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Federal Reserve’s impact on different asset classes

Federal Reserve’s impact on different asset classes

The US Treasury yields saw a significant decline in the week gone by after the Chair of US Fed failed to direct investors toward pricing more tightening of monetary policy. After from this, the US employment data exhibited a significant slowdown in hiring activity. Large retreat in yields adversely impacted the US dollar, resulting in significant rally rally in major currency pairs like EUR/USD and GBP/USD. In analysing the Federal Reserve’s impact on different asset classes, it is important to understand the impact of bond markets on equity markets. 

These dynamics of bond markets positively impacted the risk assets too, resulting in the increase in both S&P 500 and Nasdaq 100. Traders believe that the past week as the best week since November 2022. With some clarity in the economic outlook and early signs that recession might not be imminent, experts believe that stocks have a room to run higher in the near term. Apart from this, holiday season is expected to add some source of strength to this expected rally. 

While Federal Reserve’s impact on different asset classes has been provided, it is important to understand the impact on gold. Bullion was subdued as the precious metal was not able to take advantage of weaker US dollar and declining government rates. Experts believe that the geopolitical premium which got built up in gold and other safe-haven assets after terrorist attacks in Israel has seen some winding up. This is because the war against Hamas did not escalate into the wider regional war in Middle East, which was earlier expected by several market experts. 

Talking about the expected movements in Dow Jones and S&P 500, there will be no major economic reports in the US this week which can impact the market indexes. However, a range of Federal Reserve members, which includes the Chair, will speak in the public forum. Retail traders and short-term investors are required to closely track such events and they should assess the official statements so that some insights into the central bank’s thinking can be gathered. The commentary might also provide the expected path of monetary policy.

Any kind of indication that policymakers will refrain themselves from increasing the interest rates might negatively impact the US Treasury yields and the dollar. However, it might provide some more support to stocks.

As per the FactSet’s data, ~82% of the S&P 500 companies were able to report positive EPS surprise and ~62% of S&P 500 companies have seen a positive revenue surprise. 

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