The S&P/ASX 200 Index (ASX: XJO) is under pressure today, down 2.14% in morning trade.
This comes following a rapid sell-off in United States stock markets yesterday on the heels of the Federal Reserve's latest interest rate hike and Fed chair Jerome Powell's media address that followed.
The S&P 500 Index (SP: .INX) was up 1.2% at 2:36pm New York City time, shortly after the Fed's announcement. In the 84 minutes following, the S&P 500 plunged 3.5% to close the day down by 2.5%.
The ASX 200 is skipping that initial surge and has gone straight to the plunge.
What happened with the Federal Reserve to send the ASX 200 lower?
The ASX 200 is quite sensitive to moves in US stock markets. And US stock markets are highly responsive to the interest rate settings and outlook for future moves from the Fed, the world's most influential central bank.
Markets had widely anticipated and priced in the Fed's decision to lift the official interest rate by another 0.75%. The fourth consecutive hike brings the US rate in the range of 3.75% to 4.00%.
With the rate rise largely baked in and the Fed stating yesterday that any further decisions to increase interest rates would take into account "the lags with which monetary policy affects economic activity and inflation," investors were initially bullish.
But Powell was quick to pull the plug on the share market party in a post-announcement news conference.
"We think we have a ways to go," he said, "before we get to that level of interest rates that we think is sufficiently restrictive."
If that wasn't enough to send US equities lower yesterday, and the ASX 200 today, Powell added:
The level of rates that we estimated in September, the incoming data suggests that's actually going to be higher. There is no sense that inflation is coming down…. We're exactly where we were a year ago.
And ASX 200 investors buoyed by speculations that the Fed may be poised to take a breather from its aggressive rate hikes will be deflated by Powell's assertion that, "I would also say that it's premature to discuss a pause. It's not something that we're thinking about. That's not a conversation to be had. We have a ways to go."
What are the experts saying?
With the S&P 500 down 2.5% overnight and the ASX 200 down 2.5% in morning trade, Federated Hermes senior portfolio manager Steve Chiavarone may have it right when he calls the message from the Fed a "devil's bargain" (courtesy of Bloomberg).
"This is a devil's bargain. Size of rate hikes will likely fall, but terminal rate is likely higher. The implication is a greater number of smaller rate hikes. That is not dovish," he said.
Robert Almeida, global investment strategist at MFS Investment Management said investors should prepare for the end of the cheap money era.
According to Almeida (quoted by the Australian Financial Review):
What's clear is that central banks must continue raising the cost of capital. That will be done not only through hiking policy rates but also by balance sheet reduction. Aggregate demand is too high and can only be reduced by squeezing out the market inefficiencies built up over the last decade.
But all is not doom and gloom for ASX 200 investors.
"In the process, weak companies will be exposed and above-average profit margins will no longer be abundant, but scarce," Almeida added. "We think that scarcity will inflate the value compounders and reward the skilled and patient investor."
