Hawkish Tone from Chairman Powell and Bank of England's Surprise Rate Hike Drive Market Sentiment


Equity Markets Rally as ECB Raises Rates and Fed Pauses

Monday, June 26, 2023 By James Hindmarch, CFA

The focus of the financial markets this week revolved around the hawkish sentiment expressed by Chairman Powell during his annual state of the economy address to Congress. His remarks echoed his post-FOMC comments from the previous week, emphasizing that the pause in June was temporary, and the overnight rate is likely to see further increases later this year, potentially even twice.

The market took note of this, resulting in the 5-year Treasury note surpassing 4.0%, a level not seen since February. Furthermore, the April 2024 Fed Fund futures traded above 5.0%, as traders speculated that high overnight rates might persist into the following year.

BoE Rate Rise Exceeds Projections

In line with expectations, the Bank of England (BOE) raised its overnight lending rate by 50 basis points (bp) to 5.0%, exceeding economists' projections of a 25 bp hike. Similar to the Federal Reserve, the BOE left the door open for additional rate increases to tackle their ongoing inflation concerns.

Reflecting this anticipation, the Pound Sterling continued to exhibit strength against the U.S. dollar, reaching levels above 1.27, marking an impressive nearly 20% increase since its low point in September 2022.

Slight Decline in US Markets

US stock markets experienced a downward trajectory this week, with the NASDAQ and S&P 500 declining by 1.4%, and the Dow by 1.7%. The oil market also faced challenges, failing to sustain a position above the 50-day moving average, resulting in a 3.4% decline.

Meanwhile, gold continued its downward trend, finishing the week with a 1.8% decrease. US 7-10 Year bonds and US aggregate bonds remained relatively stable, exhibiting little movement over the week.

Volatility, as measured by the VIX, experienced a significant drop and concluded the week at 13.44, marking its lowest level since the pre-COVID era. However, it is noteworthy that contango, the term structure of the VIX futures, remains steep, with a 1-month contract trading at 15.95 – a premium of 18.5%. The 2-month and 3-month contracts also displayed similar elevated levels at 17.5 and 18.5, respectively.

The Week Ahead

Looking ahead to the coming week, the economic calendar is brimming with significant releases, including Durable Goods, Case-Shiller home price index, and the Conference Board's data, among others. However, it's important to bear in mind that transaction volume is expected to taper off towards the end of the week due to the upcoming Independence Day holiday falling on the subsequent Tuesday.

General disclosure:This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any specific investment product, strategy, plan feature or other purpose in any jurisdiction, nor is it a commitment from Aria Capital Management or any of its related companies to participate in any of the transactions mentioned herein. This material may contain estimates and forward-looking statements, which may include forecasts and do not represent a guarantee of future performance. This information is not intended to be complete or exhaustive and no representations or warranties, either express or implied, are made regarding the accuracy or completeness of the information contained herein. The opinions expressed are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. Past performance does not guarantee future results. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.


For more information and answers to any questions you may have, please contact us.

There was a problem validating the form please check!
The connection to the server timed out!