August saw significant drops in both the US and European market indices, and concerns about interest rates staying high for longer have arisen due to persistent inflation and a robust economy. Despite expectations that the Fed's monetary tightening will come to an end, there are still worries that interest rates may stay high for a considerable amount of time.
Investors hope for a halt in the rate increases
On Wednesday, the US and European stock indices opened the day with less pessimism than on prior days. The indices experienced steep declines in the first half of August, with the S&P 500 reaching its lowest point in more than a month.
The data that highlight persistent inflation and an abnormally strong economy, which have stoked concerns that interest rates will remain high for longer, are to blame for this drop.
Even though most investors anticipate the Fed's monetary tightening to be coming to an end, worries linger that the central bank may leave interest rates where they are for an extended period.
The market has nearly 91% of investors betting on a halt to rate increases by September.
Retail sales have an upbeat outlook
The 10-year bond is already above 4.20%, levels last seen in November of last year, while market interest rates (treasury yields) have climbed considerably recently.
Retail sales continue to reflect strong domestic demand that has not been impacted by the tightening of credit conditions. Target's results, which not only exceeded market forecasts but also revealed advances in its yearly sales targets, were released yesterday. The stock entered trading with gains of more than 6% during the day.
Today, the earnings report for Walmart is released, the biggest retailer in the country.
The banking turmoil takes its toll on gold
On the downside, the banking industry is threatened by rating agencies with downgrades for both large banks and small regional banks.
One of the elements that could endanger the viability of these banks' balance sheets is the decline in the price of treasury bonds, or, to put it another way, the increase in yields. As an illustration, JP Morgan's stock value has decreased by about 6% during the past month.
The asset most impacted by high interest rates is gold, which loses appeal as a substitute investment that guards against inflation. Technically, gold is holding a significant support zone between $1,890 and $1,900 after dropping almost $80 over the previous 30 days.
Sources: Bloomberg Reuters
- US and European Indices were less pessimistic than the previous day
- Investors anticipate the Fed's monetary tightening to be coming to an end
- Retail sales continue to reflect strong domestic demand
- Walmart's earnings report is released today
- The banking industry is threatened by rating agencies’ downgrades