The rate hike craze

AS what we have projected previously, May is the month of rate hike and stock plunge. Earlier this month, the US Federal Reserve announced 50 basis points hike on its Fed funds rate. Fed Chair Jerome Powell comforted the market sentiment by saying that another 75-basis points hike is definitely not in his plan for the near future. The US stock markets traded in firm demand.

Following this, Bank of England added 25 basis points to its benchmark rate and stood at one per cent – its highest level in 13 years. Policymakers predict the current inflation of seven per cent in 30 years’ high will likely surge to 10.0 per cent towards the year-end. Theoretically, it’s a hint that there will be more aggressive rate tightening in coming months.

On that night in Asia time zone, the Dow plunged more than 1,000 points at close. European stock markets plummeted and the pound fell on Friday. Asia markets also slid out of fear. The pound/ US dollar dropped to the low in May 2020 when it was hit unexpectedly by the pandemic outbreak.

In fact, we predicted in January that the 2022 will not be a good year for stocks and bonds. The whipsaw in metal prices is volatile but eventually market players will still seek safe haven in gold prices towards the third quarter seasons.

Moving into the 3Q seasons after June, we will probably see more volatility in stock markets as the US Federal Reserve taper their monthly bond purchase by US$95 billion and subsequent credit hike in the Euro-Am markets,

On hindsight, we do not foresee the US dollar to stay at the current high levels since the euro and yen have devalued to its neck.

If they stay at current lows against the US dollar, the domestic economies in eurozone and Japan will very soon suffer recession and a price war in their onshore asset prices.

Among the five major currencies comprising the US dollar, euro, pound, yen and Chinese yuan, People’s Bank of China (PBOC) is the only party that goes against the Euro-Am central banks by reducing the rates.

Chinese policymakers do it by cutting the reserve ratio in banks so there will be more onshore liquidity and borrowings by consumers.

In our simple comprehension, the Federal Reserve cuts rates and raises interest rates in cyclic timings to enhance and manipulate to their unfair advantages, so the global funds can be repatriated to US soil such as the current warfare in Ukraine.

The ultra-rich monies have been sucked into US and European countries out of fear and escapade from Russia and Central Asia. For China, the adjustment of rate policy is to fight the real economic situation and do at its best effort for the Chinese citizens.

By reducing the banks’ reserve ratio, PBOC is trying to stimulate domestic spending at the same time closing the floodgate to prevent the Chinese funds flowing to overseas markets.

This is a smart move and pitting a tug-of-war between the East and West monetary policies.

In summary, we advise a steer-off stocks and bonds this year. Few more rounds of rate hikes will come in the second half of 2022 from the Euro-Am policymakers.

What may be good to focus on will be the mining stocks and precious metals. Stay alert for the next rise in these instruments!