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The future of long-term interest rates is in question – Market Overview

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Miguel A. Rodriguez
Miguel A. Rodriguez
05 November 2022
There is a wide-open debate in the market about the future evolution of long-term interest rates, their implication in future monetary policy decisions and the consequences for stocks.

The ECB does not show a clear direction in this regard. On the one hand, they state that they will not allow increases in interest rates in the long part of the curve due to their negative implications on financing conditions. On the other hand, as it was the case today with Board Member Klass Knot's statements, they consider that these increases respond to expectations of growth for the economy and can be perceived as positive.

The Federal Reserve has a more unified discourse, and from the beginning, they have not expressed any concerns in this regard. However, it is also true that since their asset purchase program is unlimited, they could increase purchases and stop the fall of the treasury bonds at any moment.

Market participants highly anticipate the appearance of FED President Powell this afternoon. They expect Powell to give more clues regarding the future of monetary policy and make a more explicit reference about Fed’s position on this matter.

Meanwhile, concerns about the future evolution of the stock markets are increasing. Uncertainty about the future of interest rates and rising inflation expectations, especially in the United States, is starting to weigh heavy on the leading world indices.

After a slight technical recovery at the beginning of yesterday's session, the main indices have once again experienced a fall, trading in areas that point to more significant corrections or even a potential change of trend.

The Tech100 technology index, the one that has had the best performance during the pandemic crisis, is the one that is being most punished in this new scenario.

Technically it has closed below the 12691 support level and triggered a reversal pattern that points to a theoretical target around 11468.

Powell's statements this afternoon may be a factor that could finally define this movement or, on the contrary, slow it down should it show a clear determination to prevent long-term interest rates from continuing to rise.

Something similar is happening with the Japanese stock index, Japan225. After having recorded an outstanding performance in recent months, it finds itself at the point below which a more profound bearish path would open.

Technically below 28,947, the index would head towards a target zone situated around the 100-day SMA line, currently at the 27,000 zone.

Another element to take into account and that could significantly influence the market will be the result of the labour market data published today and tomorrow, Unemployment Claims and Non-farm payrolls.

The ADP Non-farm Employment change data was published yesterday, showing a lower figure than expected, 117K vs 177K, and marking a negative precedent for the upcoming NFP report.

Sources: Bloomberg, Reuters.

This information/research prepared by Miguel A. Rodriguez does not take into account the specific investment objectives, financial situation, or particular needs of any particular person. The research analyst primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views and consequently any person acting on it does so entirely at their own risk.The research provided does not constitute the views of KW Investments Ltd nor is it an invitation to invest with KW Investments Ltd. The research analyst also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report.The research analyst in not employed by KW Investments Ltd. You are encouraged to seek advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit that conforms to your specific investment objectives, financial situation, or particular financial needs before making a commitment to invest. The laws of the Republic of Seychelles shall govern any claim relating to or arising from the contents of the information/ research provided. 

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Miguel A. Rodriguez
Miguel A. Rodriguez
Financial Writer

Miguel worked for major financial institutions such as Banco Santander, and Banco Central-Hispano. He is a published author of currency trading books.