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Market sentiments change among investors

Miguel A. Rodriguez
Miguel A. Rodriguez
05 noviembre 2022
in just two days, market sentiments changed as investors doubted the zero-interest phase longevity

The Nasdaq index has risen more than 4%, almost recouping all the losses suffered last week after Federal Reserve Chairman "Jerome Powell " explicitly raised concerns about inflation in his appearance before the Senate and talk of a more rapid reduction in current bond purchases, all of which fueled bets on an anticipated rise in interest rates next year to curb inflation.

The unemployment rate, which fell to 4.2%, also contributed to these expectations. The appearance of a new strain of the virus with a greater infection capacity, on the other hand, may cause a decrease in the level of global economic activity and is considered to be another trigger of a new wave of fear in the market with an apparent increase in the risk aversion.

However, in just two days, sentiment has changed among investors.

Everything seems to indicate that investors can understand that a zero-interest rate environment will not last forever. The Fed could use a more measured approach to increase interest rates instead of reaction more dramatic in the face of rising inflation.

But these are just assumptions, and what will happen will largely depend on the upcoming market inflation data. We will know the first clue after the Fed meeting next week, so it is still premature to consider these assumptions accurate.

On the other side, some optimistic comments from a senior US official about the nature of the Omicron variant and the news that speaks positively about the efficacy of a COVID-19 drug against the latest variant, have boosted investor sentiment, who for now have put aside concerns about the effects on the economy that this new variant could cause.

But as in the case of future monetary policy, this aspect remains to be seen and the uncertainty is even greater.

This sudden and unfounded change in market sentiment has been immediately reflected in the VIX index, the so-called fear index, which after rising above the 30 zone due to the increase in risk aversion, has reverted most of the rise approaching again to the 20 zone where the 100 and 200 day moving averages pass. In other words, a return to normality as far as risk is concerned. 

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For the same reason above and in the currency market, the currencies most sensitive to risk sentiment and economic growth expectations, such as the Australian Dollar, have undergone a remarkable recovery after weeks of continuous declines.

AUD/USD has gained 1.70% in the last two days and is approaching a first reference level that could act as resistance around 0.7140, but still far from key areas to consider a trend change.

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Sources: Bloomberg, Reuters






Miguel A. Rodriguez
Miguel A. Rodriguez

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