Are global stock markets heading for another crash?

Such was the initial joy that many chose to overlook his condition that the process has a long way to go.

Instead, investors began scrambling for position ahead of the so-called Fed pivot, hoping to be first out of the blocks.

Then it all went wrong. Suddenly 2023 didn’t seem so clear. Last week, Mr. Powell became more aggressive, noting that economic data had come in stronger than expected since he last spoke.

He then added the chilling warning that the eventual interest rate level will probably be higher than previously expected.

Panic ensued. Stocks, Bitcoin and Gold gave up gains as bond yields skyrocketed.

James Bentley, director of Financial Markets Online, says the shock was palpable. Not only did Mr Powell say that the door to further big rate hikes was open, he gave the impression that he was ready.

The Fed Funds rate currently ranges from 4.5 percent to 4.75 percent, with markets expecting a modest 0.25 percent increase at the next meeting on March 22.

After Mr. Powell’s shift, they had factored in a 70 percent chance of a 50 basis point increase in the base rate to 5.25 percent, according to the CME FedWatch tool.

Investors were also shocked by January’s nonfarm payroll numbers, which show that the booming U.S. economy created 517,000 new jobs in a month, putting more pressure on Powell to raise rates to a . prevent an inflationary wage-price spiral.

Suddenly there was talk of interest rates peaking at an unthinkable 6 percent, a figure that would crush the life out of the global economy.

While Goldman Sachs analysts are unsure of a rate hike this month following the collapse of Silicon Valley Bank, the 6 percent US rate remains a possibility as the Fed gets aggressive with inflation, said Vijay Valecha, chief investment officer at Century Financial.

That would be the highest rate in more than 20 years and would be a major dent in corporate profits. If that happens, the markets will be heading for a hard landing.

Higher interest rates would also push the US dollar to new highs as investors flee to the world’s number one safe haven asset class, further depressing demand for dollar-denominated crypto and gold and making them more expensive for buyers in other currencies .

A stronger greenback will also hit emerging markets, which have borrowed heavily in dollars and will pay more to pay down their debts, Valecha says.

Investors had become too complacent about the Fed’s pivot, says Jason Hollands, director of investment fund platform Bestinvest.

Although US inflation has eased in recent months, it was still 6.4 percent in January, well above the Fed’s target of 2 percent. Core inflation is particularly sticky.

Higher inflation for longer is bad news because it drives up borrowing costs for businesses and consumers. Companies with highly leveraged balance sheets now face much higher refinancing costs, while inflation diminishes the value of future cash flows in real terms, says Hollands.

It will also push bond yields even further, putting them back on the map with investors who ignored them for years, says Hollands.

This is bad for equities, as investors can get competitive returns from bonds, but with less risk to their capital. It’s even worse for Bitcoin and gold, as neither pays interest. Bitcoin has dropped below $20,000 and the gold price has also lost its lustre.

Investors had moved from cheerful optimism to stark pessimism in a matter of days, and that’s when things got really confusing.

On Friday, the US nonfarm payrolls for February showed an additional 311,000 jobs were created in February, surpassing the forecast of 205,000, beating expectations for the 10th consecutive month.

However, this was well below the January figure and there were some disturbing numbers, with unemployment reaching 3.6 percent against a forecast of 3.4 percent, wage growth slowing and hours worked falling.

This is not the behavior of an impregnable job market, says Bentley. The revelation that the US job market is more fragile than previously thought will make the Fed’s next moves more cautious.

If the Fed continues its rate hikes, more problems could surface as people struggle to service their debts, says Fawad Razaqzada, market analyst at City Index and Forex.com. Those concerns may deepen if the Fed opts for a rate hike of 50 basis points this month.

Markets are now turning their attention to the consumer price inflation announcement on Tuesday for February, with retail sales data to follow the following day.

The data will decide what the Fed does next, but now there is one more concern to add to the mix, says Mr. Razaqzada.

On Friday, US bank stocks collapsed after Silicon Valley Bank was seized by US regulators.

Shares of Silicon Valley Banks plummeted as it announced plans to strengthen its finances, while Silvergate Capital collapsed amid the crypto turmoil, Mr. Razaqzada added.

Global financial stocks fell on contagion fears amid murmurs that we are seeing a repeat of the 2008 banking crisis. However, U.S. regulators stepped in this weekend to say Silicon Valley Bank customers would be able to access their funds from Monday, Reuters reported.

Inflation around the world in the picture

This only adds to Mr. Powell’s dilemma, says Mr. Razaqzada. If he opts for more hikes, there is a risk that some regional banks could collapse, while doing nothing could exacerbate inflationary pressures.

There is no easy answer. Judging by Friday’s reaction, the market feels like no matter what the Fed does, the economy is going to take a hit.

Of course, European and UK stocks also crashed on Friday, because where the US leads, the world must follow.

Chris Beauchamp, chief market analyst at online trading platform IG, predicts more turmoil to come. The avalanche of sales doesn’t seem to be coming to an end anytime soon.

He says interest rate expectations have gone back and forth in a week.

Volatility is on the rise and consumer price inflation data for the coming weeks mean that investors can’t rest easy just yet.

So what happens next? Nobody knows. As this year has already shown us, doubting the future is impossible and often downright dangerous.

Everything now depends on the data and that is ubiquitous.

For private investors, the advice does not change. Leave your money in the market as history shows that stock prices rise over time.

And take advantage of any dips to buy more shares. You probably won’t have to wait long.

Updated: March 14, 2023, 5:00 AM