What worries when the Fed raises interest rates

What worries when the Fed raises interest rates

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2022-12-10 15:45:46

Market situation

US stock futures over the weekend showed a slight uptrend or insignificant decline. Gold price fluctuates around 1676 USD/ounce. And oil increased to 81 USD/barrel.

Crypto is still holding around $19,500. Altcoins rose slightly.

What worries when the Fed raises interest rates

The fact that the Fed raises interest rates is still the information that has been talked about continuously in the past few months. Along with that, the stock went down. What is more important, however, are international currencies and international bonds.

The Fed raised interest rates to help tighten cash flow and strengthen the dollar. Especially when other countries do not raise interest rates like the Fed. Therefore, the USD strength index (DXY) shows that USD has been much stronger than other currencies such as Euro, British pound. A stronger dollar often leads to an economic crisis.

According to investment bank Morgan Stanley, the dollar’s past peaks coincide with the Mexican debt crisis in the early 1990s, the US tech stock bubble in the late 1990s, and the housing boom that preceded the crisis. financial crisis of 2008 and sovereign debt crisis of 2012.

The dollar is destabilizing economies abroad as it increases inflationary pressures outside the US, according to global head of FX, Themistoklis Fiotakis. In particular, this could put pressure on emerging markets already struggling with inflation. Countries or individuals outside of the United States that buy bonds or debt in dollars will struggle to repay their debt when the dollar is higher than their fiat currency. And other countries may sell off U.S. securities in an effort to protect their currencies.

The so-called “zombie companies” have survived the low interest rate environment of the past 15 years, according to Deutsche Bank strategist Tim Wessel. When interest rates rise, tight cash flow can lead to mass bankruptcy of these companies. It can be seen that when interest rates increase, there are many worries about the market, and the risk of recession.

Over the past six months, the Fed has slashed its balance sheet (through bond sales) from $8.96 trillion to $8.80 trillion, a drop of just 2% that sent markets plummeting. In addition, the Fed is planning to accelerate the sale of more bonds, which will hurt the market even more.

Two big banks are in trouble

It’s been more than a decade since the financial crisis of 2007-2008 when Lehman Brothers, the fourth-largest investment bank in the United States, collapsed and filed for bankruptcy. Nearly 14 years later, Credit Suisse and Deutsche Bank, two of the world’s largest banks, are suffering from tough valuations. At the same time, banks’ credit default coverage is reaching levels not seen since 2008.

Since 2008, shares of Credit Suisse Group and Deutsche Bank are trading at extremely low values ​​not seen since the last financial crisis. Specifically, Credit Suisse’s stock price has continuously decreased over the years. The highest point was in 2007, the company’s stock was at $76 and has since fallen to around $3.

Investors are afraid of bankruptcy, so they buy insurance to prevent risks. This makes Credit Suisse’s credit default coverage (CDS) similar to the CDS level Lehman Brothers had just before the bank’s bankruptcy. Credit Suisse CEO Ulrich Koerner denied the information. He also tried to reassure employees and investors but backfired. It adds to the uncertainty surrounding the bank’s credentials.

Credit Suisse CEO shared that they won’t announce financial details until this October 27. However, according to some previous unofficial statistics, Credit Suisse has $ 160 billion in cash, $ 40 billion in equity but has 400 billion of current debt, 600 billion of leveraged debt.

Investors are also concerned about systemic risks to the global economy if these big banks fall into bankruptcy. Along with that, the world economy continued to be gloomy as energy and gas prices soared to record highs, inflation in many countries reached the highest level in 40 years, supply chains were broken, stock markets dropped significantly. and tensions between the West and Russia have been running high.

The information related to the two big banks Credit Suisse Group and Deutsche Bank are still rumors and there is no official information. However, it is still big news that investors need to pay attention to.

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