Markets open sharply on Thursday under pressure from rising US interest rates. Argentine stocks and bonds are also weak, in line with volatility on Wall Street. The Fed’s better economic outlook means that the market is beginning to see a more distinctly higher inflation context in the coming years.
The three major US indices are trading lower, with the Dow Jones down 0.1%, followed by the S & P500 which is down 0.6% and the Nasdaq is down 1.5%.
The rise in the US 10-year bond rate of 1.74% is causing market volatility, especially affecting technology stocks. An interest rate hike indicates that bonds are declining, so the stock market tends to experience such volatility, along with the fact that a rate hike makes companies’ valuations lower, and hence, a lower valuation has a bearish effect on the share price.
The current volatility in the market is due to the context of rising prices. After the Federal Reserve’s decision to keep benchmark rates at levels from 0% to 0.25%, the Federal Reserve expected the US economy to continue to rely on the evolution of the virus and that the economy is on the path of declining growth faster than expected. The context of higher growth leads to an upward shift in interest rates, which have reached their highest levels since 2019, and increased volatility in the stock market.
The economic strength that Powell and members of the FOMC now see in the US economy is reflected in the Fed’s expectations for the economy, as the Fed improved its US GDP growth forecasts: for this year to 6, 5% (previously it was 4.2%) and 3.3. % For 2022 (ahead of the 3.2% forecast).
The high economic growth scenario, combined with the monetary release implemented so far, puts upward pressure on inflation levels, which is directly transferred to US Treasury yields.
He notes that the entire US sovereign debt curve has shifted upwards so far this year. These displacements range from 60 to 100 base points in the longest sections of the curve, leaving the shortest portion of the curve practically intact. In other words, an apparent regression of the curve is seen from 3 years onwards.
The slope of the curve is observed when analyzing the yield difference between the shorter bonds (2 years) and the longer bonds (10 years), which is 150 basis points and thus reaches its highest level since 2015.
The 10-year reference rate for US Treasuries opens Thursday at 1.74%, the highest value since January 2020, that is, since the start of the epidemic.. The speed with which the rate hike was observed is impressive as it had started at the beginning of the year 10S at 0.9% and last August it was operating at 0.5% levels.
The current rise in market prices does not affect all sectors equally, with technology being the most affected.
The Technology Innovation Index (ARKK), which includes stocks like Tesla that had a great year in 2020, is one of the indices that has suffered the most in the past month. In other words, while the rate rose by 80 basis points in the past month, technology stocks have suffered the most, dropping 18% (as in the case of tech innovation stocks). The Nasdaq Tech Index is down 5% while the Tech ETF is down 3.6%. On the other hand, cyclical sectors such as finance, industry, energy, and commercial air posted gains ranging between 8% and 16% in the last month.
Bonds and domestic stocks are dropping
The adverse market scenario places downward pressure on domestic assets. Argentine bonds were negative on Thursday, with all the legs of the curve lower.
The short portion of the curve decreased 0.3% on average, similar to the middle portion which decreased by 0.25% and the long portion decreased by 0.2%. In this way, the bonds remain under pressure and their yields remain at very high levels by global standards. Argentine debt with domestic legislation yields more than 22% in the shortest portion and more than 17% in the longest portion. Meanwhile, the New York law curve results in 19% in the shorter section and 15% in the longest section.
Finally, Argentine stocks in New York also play negatively, led by Mercadolibre which is down 4.4%, followed by IRSA which is down 2.6%, and then YPF which is down 2.2%. Loma Negra, Vista Oil, Telecom and Banco Macro all dropped between 1.9% and 1%. Only Edenor and BBVA Agentina rose 1.4% and 1.3% on Thursday.