The Bank of Russia unexpectedly maintained its key interest rate at a record-high 21% , defying analysts’ expectations of another significant hike as inflation remains stubbornly elevated. The decision marks a shift toward a more measured approach in balancing economic growth and price stability. Key Details Inflation Concerns: Annual inflation climbed to 8.9% in November, well above the central bank’s 4% target , with inflation expectations reaching 13.9% in December. Policy Rationale: The central bank cited the significant tightening of monetary conditions after October’s 200-basis point hike as sufficient to resume disinflationary processes. Governor Elvira Nabiullina emphasized avoiding both economic overheating and severe slowdowns. Economic Overheating: Elevated government spending on the war in Ukraine and social programs, coupled with labor shortages and rising wages, have fueled strong domestic demand, exacerbating price pressures...
A hawkish shift by the Federal Reserve has unsettled bullish sentiment in the stock market, with Bank of America strategist Michael Hartnett warning of shaky risk appetite as US equities face their worst week in over three months.
Key Highlights
1. Fed's Impact on Sentiment
- Fed Pivot: A renewed focus on inflation concerns and fewer expected rate cuts in 2025 have dampened investor confidence.
- Stock Allocation Surge:
- Record-high allocations to US equities and low cash holdings triggered a sell signal for stocks earlier this week, according to BofA's fund managers survey.
2. Market Breadth Concerns
- Narrow Leadership:
- The S&P 500 Equal Weighted Index has dropped 7% since a November peak, while the main S&P 500declined less than 3%, indicating reliance on a few top-performing stocks.
- Banking Sector's Role:
- The SPDR S&P Bank ETF must hold near 2022 highs to sustain investor confidence ahead of President-elect Donald Trump's inauguration on Jan. 20.
3. Record Inflows and Quarterly Rebalancing
- Global Equity Inflows:
- $69 billion flowed into global equity funds this week, the largest on record.
- US stock funds saw record additions of $82 billion, despite a $6 billion outflow from bond funds.
- Index Rebalancing:
- The upcoming S&P 500 quarterly rebalance on Dec. 23 contributed to "abnormally large daily inflows" into index funds on Wednesday.
Triple Witching
- The Friday expiration of $6.5 trillion worth of options contracts is expected to drive heightened volatility and trading volumes.
Market Outlook
- Hartnett recommends diversifying outside US equities, particularly into China and Europe, before Trump's policies take effect.
- With triple witching and index rebalancing underway, sudden price moves are likely, keeping markets volatile through year-end.
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