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Old 31-05-2023, 07:58
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VolkovYuriy VolkovYuriy is offline
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Default Re: FreshForex - freshforex.com

UNPAUSABLE. FUTURE OF FED RATES

Dear clients,

Federal Reserve policymakers received a dose of unexpectedly strong US economic data on Friday, which bolstered the case for further monetary policy tightening to reduce persistently high inflation.

A 0.8% rise in consumer spending last month compared with March was good news, showing that the economy is not on the brink of recession, but discomfort for policymakers waiting for a slowdown that could ease rising pressure on prices. And the increase in core inflation to 4.7%, up from 4.6% in March, underlined the Fed's less-than-steady progress in fighting inflation. The US central bank's inflation target is 2%.

Combined with seemingly some progress on a deal to raise the debt ceiling and avert a catastrophic US default, the latest data raises doubts that the Fed will indeed "pause" its campaign to raise rates, as Chairman Jerome Powell signalled earlier this month.

Interest rate futures traders are seeing less subtlety in the numbers and are now expecting an 11th consecutive interest rate hike in June, a reversal of the June pause bets made after the last hike on May 3.

Next month's rate hike is not a definitive decision: Key labour market data from next Friday and fresh inflation data expected on 13 June are still to be announced before the Fed meeting on 13-14 June. However, there are growing expectations that even if the Fed leaves rates unchanged in June, it will hit the brakes in July. In the futures markets the odds are three to one in favour of a rate hike until then.

Fed Governor Christopher Waller one of the Fed's most hawkish voices made this point earlier last week. He said that while key data in the coming weeks as well as uncertainty over credit conditions could support a temporary rate halt, the lack of progress on inflation points to the need for further tightening.

BIG AND TECH. S&P 500' FINEST

Dear clients,

Never before in the history of US equities has a small group of companies from one industry had such an impact on the entire market. Six companies Apple, Microsoft, Alphabet, Amazon, Nvidia and Meta Platforms now have a combined valuation of around $10 trillion and account for more than a quarter of the total market capitalisation of the S&P 500.

All of these stocks have doubled in value in 2023 and Nvidia and Meta more than doubled thanks to the dawn of artificial intelligence and expectations that the Federal Reserve will soon halt interest rate hikes. The benchmark index is up 8% in 2023, but its return is down to just 2% if technology companies are excluded. The S&P 500 is also well behind the technology-heavy Nasdaq Composite, which has entered bull market territory, jumping 22% this year.

Historically, it is rare for a handful of stocks from one sector to make up such a large proportion of the S&P 500. The last time the five largest valuation companies accounted for a quarter of the total market value of the index was in the 1960s, according to Schroders. It is also the first time in history that all five of the largest publicly listed companies represent the same industry.

However, this is not all good news for investors.

It is tempting to view the dominance of the technology sector as a good thing. But single-industry stocks tend to be vulnerable to the same macroeconomic factors such as rising interest rates, which often hit technology stocks harder than other companies because they are more reliant on borrowing cash.

The overall size of the S&P 500 market is so concentrated around technology companies that it is more vulnerable to sharp price swings than before, Minerva Analysis said. When there is a narrow group of leaders, there is a big risk if something bad happens to technology. If interest rates rise to 7%, it will be bad news for the whole market.

So while the tech giants have provided a surprise rally in equities in 2023, their rising market capitalisation could end up being more of a curse than a blessing for investors.

TRADER' STARTER PACK

Dear clients,

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During webinars, FreshForex analyst will answer your questions regarding the market situation and comment on the latest news.

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