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Central banks tighten monetary policy

11th June – 17th June 2022 | Another week in the markets

S&P 500NasdaqVIXDJIARussell 1000NYSE
Nifty 50GoldSilverBrent crudeUSD-INREUR-INR

Source: MarketWatch

Hello Saturday,

This week investors’ recession fears heightened as central banks across the world tighten monetary policy and US stocks enter the bear market. 

  • Federal Reserve increases benchmark interest rate by 75 basis points
  • US stocks enter the bear market with S&P 500 falling more than 21% from January’s high
  • Crypto lending company Celsius Network freezes transactions, crypto market value declines 
  • Western companies are handing control to local management in Russia and exiting 
  • Sony and Honda enter a joint venture for electric vehicles 

Taking stock | Full throttle | Bear with us | Zero degree Celsius | Do $vidaniya | Honey Vee | Invest wisely

Taking stock 

While Wall Street saw some stocks bounce a little to end the week near flat, all major indices had their worst week in two years. Not only did S&P 500 officially enter the bear market, but it also saw its biggest weekly percentage drop since the pandemic broke out in March 2020, falling 5.79%. With a decline of 4.79%, the Dow saw its biggest weekly decline since October 2020 and Nasdaq fell by 4.78%.

Full throttle

On Wednesday the Federal Open Market Committee (FOMC) voted to increase the Federal Funds rate by 75 basis points (bps) as opposed to the expected 50 bps. This is the Federal Reserve’s most aggressive hike since 1994 and has increased it to a range between 1.5% and 1.75%. The year-end Federal Funds rate projection made in March was 1.9%. Now, Fed officials are projecting a significantly higher rate at 3.375%. At the same time, the US economy’s growth projection has been sharply cut down from initial projections of 2.8% in March to 1.7%. Fed Chairman Jeremy Powell said he expects another rate hike of 50 or 75 bps in the next policy meeting in July. 

A graph on Federal fund rate

Source: CNBC

Bear with us

US stocks officially entered the bear market on Monday, with S&P 500 slipping by more than 21% from its January 2022 record-high. For weeks US stocks had been close to the bear market territory on an intraday basis but never closed at a level that defines a bear market. Since the S&P 500 index began in the 1920s, the bear market has lasted for an average of 19 months and led to a 38% decline in prices. Throughout history, a bear market has usually been followed by a recession, and this time around, there are other red flags as well. 

Central banks around the world are raising rates to curb soaring inflation, only increasing fears of a global recession and slowing economic growth. The US was not alone in increasing its benchmark interest rates this week. UK’s central bank raised its interest rates from 1% to 1.25%, making this the fifth consecutive hike. Brazil, Hong Kong, and Switzerland have also made similar moves. 

Zero degree Celsius 

Celsius Network, a major US cryptocurrency lending company, halted all withdrawals and transfers triggering a sharp fall in the value of several cryptocurrencies. Bitcoin dropped by 14% on Monday, and the total cryptocurrency market value slipped below $1 trillion for the first time since January 2021. The volatility in the crypto market has been rapidly increasing and hit stablecoins like TerraUSD, once considered among safer cryptocurrency bets. 

The global crypto market has dropped by about 70% from its November peak. Several crypto exchange platforms in the US have announced plans to cut their workforce by over 10%. The crypto ecosystem’s structural weaknesses are expected to be underscored further as stocks enter the bear market. 

Do $vidaniya

Caught between threats from Russia to seize assets and their own efforts to comply with sanctions, several Western companies trying to leave the country have agreed to hand over their business to local management. These include Pizza Hut, McDonald’s, Shell, Renault, Zurich Insurance, and Imperial brands. As western companies plan their exits, Russian High Net-Worth Individuals (HNIs) also continue to trickle out. It’s estimated that Russia will lose about 15% of its millionaire population, which is about 15,000 HNIs, in 2022. Millionaires leaving the country had always been a trend but that migration had slowed down in 2020 and 2021 owing to the pandemic. Now, it’s three times the pre-pandemic levels owing to Russia’s attack on Ukraine. Throughout history, the migration of the wealthy away from countries has usually preceded the collapse of major economies.

Honey Vee

Japanese conglomerates Sony and Honda signed a Joint Venture (JV) on Thursday to undertake the sale of electric vehicles by 2025. This is an equal JV named Sony Honda Mobility, where each company will invest 5 billion yen ($37.52 million). Despite the announcement of this official agreement, shares of Sony, Honda, and other Japanese automakers were down on Friday as world stocks slid owing to global recession fears. 

Invest wisely

At a time like this when the world stocks are sliding, investments that offer diversification and hedge different risks should be your focus. You can do this at two levels. First, diversify across geographies since stock markets in different countries are not perfectly synced. Second, look at investment products such as Exchange Traded Funds (ETFs) that inherently offer diversification. And you can access both such investments by downloading the Appreciate App today.

Warm regards,
Another week
in the markets

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