Futures Trading Education

A 6% fall in Apple shares hit U.S. Equity Markets hard yesterday. The NASDAQ 100 led the declines closing lower by a hefty 2.86%. Markets gave up much of the returns from Wednesday as Equities continued their sell-off. Most of the bearish sentiment was driven by the news of record-high German inflation and the U.K. government’s defense of its tax cut plan. Initial Jobless Claims came in under consensus and printed at the lowest level since April. This sent Bond Yields higher as the Fed’s actions are doing little if any to slow down the labour market, while multiple Federal Reserve Officials continue to support the narrative of hiking rates and holding for longer. The Federal Reserve is exporting inflation across the globe. The U.S. Dollar is killing economies everywhere. The Fed is trying to combat rising prices, and the only way to carry out such a task is by raising interest rates. The reason the Fed wants to raise rates is to increase the buying power of the Dollar. So, as the Federal-Funds target range increases, so do yields on sovereign bonds. As that happens, investors at home and abroad clamour to buy those securities. However, as rates go up, so does the cost of borrowing funds. That is going to weigh on the spending outlook for households and businesses. And right now, the Fed is telling us it has another 1.25% in rate hikes to go before the end of this year. Until the Fed stops raising rates, its policies are going to weigh on the perceived outlook for global growth. That means momentum investors will continue to short risk assets like stocks, anticipating earnings estimates must be revised lower. So, the Dollar’s movement will continue to be a barometer for the near-term direction of the S&P 500 Index. The 10-year U.S. Treasury is considered to be one of the safest investments in the world. After all, the U.S. have never defaulted on their debt. When the payout for owning that investment increases, so does its appeal. Bear in mind, the coupon payment amount may not have changed but as underlying bond prices drop, the return size increases. Since the start of this year, the 10-year yield has risen from 1.5% to the current 3.9%. Two-year Treasuries have risen from roughly 0.75% at the start of this year to around 4.1% currently. The change tells you that investors are increasingly uncertain about the current economic environment. Those are massive moves. In other words, if you are an individual or business that needs to borrow money, the amount you must pay to service that debt has more than doubled. Thus, the payout for investors who are willing to lend money has jumped. It is no different for the U.S. government. As interest rates have risen, it costs more for them to borrow. And as I said from the start, because 10-year Treasuries are viewed as one of the safest investments in the world, a yield that has more than doubled over the past nine months makes the purchase more appealing. But if you are a foreign investor, or a domestic one who owns foreign bonds, you must convert to Dollars if you want to buy U.S. Treasurys. Thus, you must unload Euros, Japanese Yen, or British Pounds in order to buy the Dollar. But as you get out of, say, the Pound, you are increasing the available supply. And as you buy U.S. Dollars, you are diminishing the available supply. As an item becomes scarce, like the Dollar, its value tends to increase. Conversely, when supply increases, like the Pound, that same item loses value. When the Fed started raising interest rates in March, the Dollar exploded higher. As the Fed has grown even more aggressive on its policy path, the move higher in the Dollar has accelerated. Now, the Bank of England (“BOE”) has tried to keep pace with the Fed, but it’s still lagging. Since the start of this year, the Federal-Funds rate has risen from a range of 0% to 0.25% to a current range of 3% to 3.25%. Over that same period, the BOE’s official bank rate has increased from 0.2% to 2.25%. That’s a notable jump, but still behind the Fed. As the Fed stepped up the pace this past summer, the gap has widened, meaning the British Pound has lost value compared with the Dollar. This is despite the BOE having been one of the most aggressive of the major global central banks behind the Fed. Yet, a Pound with diminished buying power only stokes inflation. After all, it costs more to buy everything. As the British Pound’s value has begun to diminish, the inflation picture in the U.K. has worsened. So as the Fed is trying to tame inflation here, it is exporting the problem to other shores. The dynamic forces every major global central bank to pursue the same action. They are all staring at runaway costs and trying to figure out a solution to the problem. And as I said earlier, the primary tool is raising interest rates to kill economic growth. By doing that, policymakers everywhere are estimating that it will cost more to borrow. That will eat away at discretionary income to be spent on wants compared with needs. That money will have to be directed toward things like mortgage payments, car loans, and credit-card debt. So, inventories of goods like iPhones and sneakers can rebuild, ultimately weighing on prices, or at the least keep prices from rising. Then, in 12 months’ time, when prices have not gone up compared with the year prior, the Fed, BOE, and European Central Bank will declare victory against inflation. Mind you, that does not mean prices have dropped. But there is a broader global economic growth concern at hand. As long as the Fed stays intent on its current rate-hike path, that is creating a problem for every other central bank. As I stated earlier, a stronger Dollar is creating inflation everywhere else. And as other countries fall further behind, they are going to have to play catch-up, and fast. The changes are going to weigh on global growth. In nine months, households and businesses are having to adjust from historically low borrowing costs to those they haven’t seen in over a decade. That is going to be a problem for the consumption of everything. If the Dollar keeps rallying, there will be two main outcomes: either the Fed cools its heels to spare global economic turmoil, or other central banks are forced to rapidly raise interest rates, killing growth, and sparking a larger global sell-off. Yesterday’s 1.5% fall in the Dollar is a start in the right direction. Within the S&P 500 Index, all 11 sectors finished lower. European Markets closed lower. Markets saw further deterioration yesterday following a modest reprieve a day earlier. German inflation soared to double-digit levels for the first time in over 70 years, portraying the dire state of the region’s largest economy. Elsewhere, U.K. Prime Minister Liz Truss doubled down on her plans to fund government stimulus in the form of tax breaks and other spending. This spurred multiple Euro-Zone Bond Yields to rise in the prospect of inflation risks. And the European Systemic Risk Board issued a warning of further deterioration in the macroeconomic outlook for the region. In Asia, Markets ended the day with a mixed reaction as the positive news from Wednesday mostly tapered off. Central banks and governments continue to give varied indications of market intervention to support equities and currencies. Among banks making moves, the People’s Bank of China issued a strong statement warning against speculation after the Yuan fell to its lowest level versus Dollar since 2008. South Korea’s central bank announced its plan to buy back government bonds to support the struggling won and bolster markets. And Nikkei Asia reported that Japanese Prime Minister Fumio Kishida is set to announced measures to provide private sector relief for high energy costs. Elsewhere, Oil fell 1.12% while a weaker Dollar saw Gold close higher by just 0.1%.

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