Dow Down 540, Nasdaq Down 380 Amid US Rate Hike

After a three-day mini-holiday, the U.S. stock market reopened and immediately faced a significant drop. Last night, the Dow Jones Industrial Average fell by 543 points, and the Nasdaq Composite Index fell by 386 points, with respective declines of 2.6% and 1.5%.

It's truly concerning whether, after the A-share market opens today, people will again find "funds plummeting" topping the trending topics.

01, U.S. Stock Market Decline

Following a two-day weekend, the U.S. stock market remained closed on Monday due to a holiday. The Asian stock markets on Monday and Tuesday did not perform too poorly, and the European stock markets, which did not take a break, were initially doing reasonably well. However, no one could have anticipated the sharp decline that occurred as soon as the U.S. stock market opened.

In fact, there were already signs in the European stock market, which closed early yesterday. The stock markets of Germany, the United Kingdom, and France each experienced a decline of 0.6% to 1%. Then, when the U.S. stock market opened, it started with a gap down and continued to decline.

By the close, the Nasdaq's drop was even more significant, indicating a poor performance in technology stocks. Many Chinese concept stocks also saw declines, with three electric vehicle companies falling by 2% to 4%. From this, it can be inferred that the A-share market's new energy sector may also be affected today.

In addition to the decline in technology stocks, it was unexpected that U.S. financial stocks also experienced a widespread decline. JPMorgan Chase fell by 4.06%, Goldman Sachs by 7.04%, Citigroup by 2.41%, Morgan Stanley by 4.78%, Bank of America by 3.24%, and Wells Fargo by 2.34%. Not only did they all fall together, but the magnitude of the decline was also substantial.

As of this writing, the Japanese market has opened, also starting with a gap down, with the current decline at 1.7%.

Where does the reason lie?

02, InflationThe most important reason for this round of decline is the emotional impact on the upcoming Federal Reserve meeting. The Federal Reserve will have an interest rate meeting in January, which is the first of 2022, scheduled for January 25th to January 26th.

In fact, most of the news has been fully released during this period, and it's only a month since the last meeting. Moreover, Powell had previously given a public speech at a hearing, so normally, there shouldn't be any new content in this meeting.

However, the market doesn't think so because the recently released inflation data is indeed getting higher and higher. The U.S. CPI has reached 7.0, and the PPI has reached 9.7. Although there are signs of peaking, they are still the highest in 40 years. The Federal Reserve has always regarded suppressing inflation as its primary goal. In this situation, some people in the market even predict that the Federal Reserve may unexpectedly raise interest rates at the January meeting.

Yesterday, U.S. Treasury yields rose significantly, with the 10-year Treasury yield reaching 1.86%. These are all the market's advanced reactions.

From the process of exiting QE, raising interest rates, and shrinking the balance sheet in the last round (2013-2018), it can be seen that the Federal Reserve has gradually formed a set of methods that have been proven to be very effective in communicating with the market in the past. It will try to let the market digest every step it is going to take in advance.

Therefore, the possibility of raising interest rates in January is very small, and it is estimated that the fastest interest rate hike will still have to wait until March.

03, Appreciation of the U.S. Dollar

In fact, the fluctuations before this meeting have occurred in recent months. The Federal Reserve's interest rate meetings in the fourth quarter of last year were in September, November, and December. Looking back at the performance of the U.S. stock market in these three months, they are actually a bit similar to the current situation.

It can be predicted that if the January meeting ends, regardless of whether the Federal Reserve's attitude is hawkish or dovish, the market sentiment will stabilize.

Because of the current situation in the United States, no matter what the Federal Reserve does, it seems normal. It can be more hawkish, clearly pointing out that it will raise interest rates as soon as possible, or it can be more dovish, not taking any action for the time being, and watching the changes in the market. Both of these expressions should be acceptable to the market, and everyone is just waiting for the meeting conclusion.There is another aspect that everyone should pay attention to: last week, the US Dollar Index suddenly fell, dropping from above 96 to 94 in just a few days. However, I also judge that this should only be temporary, after all, the appreciation of the US dollar will be further accelerated due to the Federal Reserve's interest rate hikes, so the last drop was quite unexpected.

What everyone needs to be aware of is that both crude oil prices and gold prices are affected by the appreciation of the US dollar, but the impact is slightly different.

The price of oil is not only affected by the US dollar but also by the supply and demand relationship, but gold is different. Therefore, I believe that in the process of the US dollar further appreciating, gold will continue to decline slowly.