The myth that US stocks kept "not falling sharply" was shattered.
Friday was another night of massacres, with the Dow down nearly 1,000 points and all three major U.S. stock indexes tumbling more than 2.5%, their worst day since October 2010.
The Dow Jones index closed down 979.32 points, or 2.81%, to 33,813.44 points; The S&P 500 index closed down 119.36 points, or 2.72%, to 4274.30 points; Nasdaq Composite Index closed down 330.76 points, or 2.51%, to 12,843.89 points.
Investors withdrew $17.5 billion from global stock markets this week, the largest weekly outflow in history.
There are three reasons behind the decline of US stocks this time, and each layer is more complicated than the other (not juxtaposition, but progressive relationship).
The first layer of reason
Traders ramped up their bets on the Fed raising interest rates, betting that the Fed would raise rates by 50 bps each of the next four meetings.
It can be calculated accordingly:
-The remaining six meetings of the Federal Reserve this year are in May, June, July, September, November and December
-Four 50 basis point interest rate hikes, equivalent to 200 basis point interest rate hikes
-The current interest rate level is 0.25%-0.5%. After four sharp interest rate increases, the interest rate will reach a neutral interest rate level of 2.25%-2.5% in September (neither stimulating nor restricting the economy)
After September, there will be two 25 basis point rate hikes, which will reach the end-point rate of 2.75%-3% expected by Wall Street by the end of this year
Just looking at inference, we can read a lot of hidden information.
First, the interest rate will reach a neutral level in September. If inflation can be effectively controlled at that time, then around September will be the bottom date of US stocks, because after that, the market will speculate on "raising interest rates and reducing codes" and then "cutting interest rates". If Sino-US relations ease at that time, A shares may have their own bottom after the bottom of US stocks.
Last night, US Treasury Secretary Yellen hinted that she was open to cutting tariffs on Chinese imports that were generally imposed during the Trump era in order to get rid of high inflation. Yellen, who has been chairman of the Federal Reserve for four years, knows very well that the current inflation cannot be solved by monetary policy alone. Ms Yellen is likely to start pushing after the Fed's two 50 basis point rate hikes (if inflation has not cooled significantly).
'It's worth considering,' Yellen said in an interview Friday when asked about the removal of tariffs. Of course, we want to do our best to solve the inflation problem, which will have some gratifying results. This is the problem we are studying.
Second, in any case, May will be hyped around "raising interest rates by 75 basis points in June", and May will be the most difficult month-the possibility of a sharp strengthening of the US dollar is still there, and it may also be the month with the greatest pressure on RMB depreciation.
Third, although the market's expectation for the Fed to raise interest rates has increased, it has not been reflected in the bond market, especially the yield of 2-year US bonds synchronized with the interest rate trend has actually fallen (closed at 2.67%, a decrease of 0.57%).
Fourth, a question left for us to gain insight-will we raise interest rates this year to the end rate of 2.75%-3% expected by Wall Street, and will we raise interest rates next year?
The second layer of reason
Investors have been dazed all day by the Fed's interest rate hike expectations. Have you ever thought of an imminent big problem-the market is increasingly uneasy about the possibility of Fed policy mistakes-when Fed officials propose to raise interest rates by 50 basis pointsThe market will immediately begin to try to price a 75 basis point rate hike; When Fed officials suggested two 50 basis point rate hikes, the market immediately set a price three times (it even reached four times last night).
This is a very serious problem. Market expectations are always out of sync with the Federal Reserve, and there is always distrust of the Federal Reserve, which is the root of market turmoil.
Two special measures of inflation expectations have changed.
1) The current 5-year/5-year break-even forward interest rate reflecting inflation expectations in the next five years, It reached its highest level since mid-2014 (an indicator used by the Federal Reserve as a monetary guide), which can not only provide market views on forward inflation, but also reflect whether the market believes that there are enough ammunition in the central bank's policy toolbox to control inflation within the target range.
2) The 10-year break-even inflation rate in the United States, which measures the market's expectation of inflation within 10 years, is also at a high level.
Higher inflation expectations reflect the market's expectation of the Fed's policy mistakes.
The third reason
The decline of US stocks is the top-level design of the Federal Reserve, and the Federal Reserve needs to let it fall-because most of the wealth of many American families comes from the stock market, and the decline of the stock market will affect their willingness to spend and indirectly weaken inflation.
In fact, this week, the market further raised the expectation of raising interest rates, which was pushed by the Federal Reserve.
-Federal Reserve Chairman Powell outlined his most aggressive anti-inflation strategy so far
-The chairman of the St. Louis Fed opened a heated debate on "raising interest rates by 75 basis points" (the Fed intends to release the wind and test the water to raise interest rates by 75 basis points)
-"Big dove" San Francisco Fed Chairman Daley also said that there is the possibility of "raising interest rates by 50 basis points several times"
A week before the silence period, Fed officials pulled the market's expectation of raising interest rates to a peak. What is the purpose?
Remember Powell's words: Monetary policy will have an effect on the financial environment. This is how it affects the real economy.
How do you feel after reading the above analysis? How many levels can be analyzed? Investment is an extremely difficult path to success, not only to understand the news, but also to see through it. We should not only understand the market, but also see through it. You should be proficient in every aspect of trading. The market is a mirror, and all your shortcomings are exposed to the market.
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