ASX 200 bleeds; US Interest rate hike shook the global markets

The market continues to be volatile in 2022, driven mainly by the impact of the geopolitical issues due to Russia Ukraine war and the rising inflation rate followed by the recession fears amongst the people.

On 14 September 2022, ASX noted a significant drop in the benchmark index ASX 200 as inflation shock in the US sent Wall Street tanking. In the early trade today, more than AU$62 billion was wiped out.

By the end of the trading session on 14 September 2022, ASX 200 dropped sharply by 2.58% to 6,828.60, and by this time, it crossed below its 50-day moving average.

Not only ASX but the stock market across the globe tumbled as investors feel that the United States' inflation rate is not slowing as per their expectations. The previous day, the US announced inflation data for August 2022.

Do Read: The U.S. Bureau of Labor Statistics announced 0.1% growth in CPI for All Urban Consumers in August

The inflation data released yesterday triggered fear amongst investors of a more drastic interest rate hike by the Fed. Many traders are now pricing in a high probability of an increase in interest rate by 75 basis points next week. Further, markets are assuming a 1% increase by next week.

In this article, we will look at the impact of inflation on major US indices, investors, businesses, and the dollar.

US Indices performance as on 14 September 2022:

• NASDAQ Composite Index dropped 5.16% to 11,633.57.
• NASDAQ-100 was down 5.54% to 12,033.62.
• S&P 500 declined 4.32% to 3,932.69.
• Russell 2000 tumbled 3.91% to 1831.57.

How is an increase in interest rate linked to stock market?

Changes in the interest rate have positive as well as negative impacts on the markets. In such a situation, central banks change their target interest rates in response to economic activity. When the economy is overly strong, the banks increase the interest.

Interest rate fluctuations send ripple effects throughout the economy. When interest rates increase, it becomes expensive to acquire money. Banks offer loans at an increased rate. Consumers have to pay more and are left with less disposable income. As a result, its impact could also be seen in other sectors. Businesses from the consumer discretionary field may experience a drop in the demand for their offerings. Households will be more careful with their money by controlling their expenses.

Not only consumers but businesses are also impacted more intensely. Because of the rise in the interest rate, it becomes costly for them to borrow money. As a result, many businesses revise their expansion plans, which limits their growth. It may also lead to budget cuts and reduce their earnings, resulting in a drop in their share prices.

Interest rate impact on the markets and Australian dollar now:

At present, there are four factors influencing the interest rate. These are inflation, interest rate, a stronger dollar, and the Ukraine war.

The Australian dollar today was down ~2.3%. It was the biggest drop seen since COVID-19. Following the announcement, AUD/USD FX Spot rate dropped from US 68.85 cents to US 67.3 cents. It further slipped today and steadied at 67.08 cents.

Because of the rise in the interest rate, pressure is also increasing on the Reserve Bank of Australia to sustain the speed of the increase in interest rate.

On 06 September 2022, RBA increased its interest rate for the fifth consecutive month. It lifted the official cash rate by 50 basis points from 1.85% to 2.35%. Experts believe RBA might also hike the interest rate by 50 basis points at its October meeting.

Positive side of the increased interest rate:

While the increase in the interest rate will be problematic for investors applying for loans, saving account interest rates also increase simultaneously. People can gain in the form of interest rates.

What strategies do investors apply during inflation periods?

We know that a rise in inflation causes a drop in currency prices. But one can overcome this by inflation hedging. Through inflation hedging, investments can protect the value of their assets.

Many investors plan inflation by cultivating asset classes that can outperform the market during the inflationary pressure. Some of the strategies include:

• Shifting the funds from bonds to stocks.
• Many investors add global stocks or bonds to their portfolio.
• Investors also opt for debt instruments like treasury bonds.
• The Real Estate sector is another area investor prefer during inflation periods.
• Investors also prefer buying senior secured bank loans to earn increased yield while safeguarding themselves from price drops if rates start to rise.

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