China and the Fed put pressure on Wall Street
Wall Street started the week on a negative note, with the main US indices falling more than 1%, penalized by the latest events in China and hawkish rhetoric from the New York and St. Louis Fed offices.
Sentiment was penalized as of Sunday evening by the massive demonstrations in several major Chinese cities, including Hong Kong and Shanghai, in response to health restrictions, but the stock market indices are already trying to regain height this morning following new rumors of a potential lifting of restrictions.
According to the latest rumors, Beijing will soon announce the end of the zero-covid policy emphasizing the low mortality rate of new variants and the fact that the zero-covid policy has achieved historic success in protecting the lives of people. The National Health Commission has also just published a plan to accelerate vaccinations for the elderly.
Risk aversion was bolstered on Monday by New York Fed President John Williams, who said rates needed to rise further and stay high through next year and St. Louis, James Bullard, who indicated that the Fed “still has a way to go to get restrictive” and that the key rate must be raised to at least 5% to bring inflation down. These declarations raised fears of a longer tightening of the Fed’s monetary policy, which penalized equity markets and prevented the bond market from benefiting from renewed uncertainty about global growth.
Investors will continue to watch developments in China closely, but the focus will temporarily turn to Jerome Powell’s speech at the Brookings Institute on Wednesday, then to PCE inflation on Thursday. The Fed Chairman could take advantage of this intervention to toughen his tone given the significant improvement in financial conditions in recent weeks.
Daily Dow Jones price chart (CFD Wall Street) – key levels