Shares on Wall Street are advancing after Atlanta Fed Bank President Raphael Bostic said this Tuesday that the U.S. central bank does not need to raise rates any further. The 10-year Treasury yield fell immediately off from its 16-year peak after his words, which is also positive because rising yields on long-term U.S. Treasury bonds directly influence financing costs for households and businesses.
Last week, we had a situation when “hawkish” comments from Fed officials kept the 10-year Treasury yield buoyant, and the result was that investors shifted their money away from stocks, leading to a decrease in stock prices. Atlanta Fed Bank President Raphael Bostic also added that the U.S. economy remains healthy, and because of this, he sees no recession ahead.
Financial markets welcomed this information, and investors now expect that the Fed is shifting away from the prospect of a November interest rate hike. CME’s FedWatch tool reported that the chance of interest rates remaining unchanged in November and December meetings stays at around 88% and 74%.
However, it is important to keep in mind that Federal Reserve Chair Jerome Powell warned several times in the last several weeks that the U.S. central bank is “prepared” to increase interest rates further if needed as it seeks to bring inflation down to its 2% target. Because of this, investors’ focus will turn to inflation readings, including September producer price and consumer price indexes, for more clues on interest rates path.
At the same time, the focus of investors remains on escalating tensions in the Middle East between Israel and the Palestinian Islamist group Hamas after Hamas’ surprise strike on Saturday that killed hundreds of Israelis. The Israeli military has since said it called up an unprecedented 300,000 reservists and was imposing a total blockade on the Gaza Strip, raising expectations of a possible ground assault.
The markets’ initial reaction to the major geopolitical developments in the Middle East was a bout of risk aversion, and the latest news is that Israeli air strikes attacked Gaza, razing entire districts in the densely populated and impoverished enclave, filling morgues with Palestinians, including women and children, as it took “revenge” for a deadly weekend of Hamas attacks that triggered some of the worst blood-letting in 75 years.
John Praveen, managing director & co-chief investment officer at Paleo Leon, said that while the Fed’s dovish comments are helping stocks and cryptocurrencies, the situation could easily change if, for example, the fighting between Israel and Hamas spread to other countries in the region. John Praveen, managing director & co-chief investment officer at Paleo Leon, added:
“Everybody has one eye on the Middle East conflict, and if tensions escalate, equities will sell off in that instance because of increased uncertainty and risk aversion.”
Investors should keep in mind that stocks aren’t the only assets that could significantly lose their value, and cryptocurrencies could also be in the situation to make an even bigger fall, especially if Bitcoin fell again below $25,000 support level.
