Markets’ sensitivity to policy decisions is a well-acknowledged fact that, has virtually a domino effect on the shares as well as on overall economy.
Needless to say that already jittery financial markets over the shortage of computer chips got shock waves, when the US treasury secretary, Janet Yellen said that a modest increase in borrowing costs might be needed to curtail the demand.
Tremors
German manufacturers, such as Volkswagen and Siemens and US tech stocks such as Microsoft, Amazon, Facebook Apple and Alphabet (the owner of Google) were among the biggest sufferers as investors opted for shares perceived as less risky.
The tech-heavy Nasdaq index down by more than 2% in early New York trading, while Germany’s Dax index recorded its biggest decline of 2021 so far – dropping 384 points to 14,852 points, a fall of 2.5%.
Meanwhile , in London, the FTSE index failed to upkeep to its early gains as Yellen’s comments became public– dropping 130 points from its high-point of the day to close 46 points lower at 6923 points.
The optimistic mood earlier in the markets vanished when financial markets sensed the damage caused to economies by a year of lockdowns could make supply unable to keep up with demand, leading to increasing inflation, in addition to the possible removal of stimulus by central banks.
This pessimistic mood further reaffirmed by reports of supply bottlenecks and the warning from Yellen that the Federal Reserve might need to reconsider its zero interest-rate policy as a consequence of the extra demand being injected into the US economy.
In an interview with the Atlantic magazine, Yellen, expressing her view on the multi-trillion spending plans announced by President Joe Biden, said that it would be good for the economy but action by the central bank might still be needed to prevent the world’s biggest economy from growing too fast.
“It may be that interest rates will have to rise somewhat to make sure that our economy doesn’t overheat, even though the additional spending is relatively small relative to the size of the economy,” she said.
Danni Hewson, analyst at AJ Bell said, “Today’s warning came from German chipmaker Infineon which is ramping up supply but estimates the current situation will results in 2.5m fewer cars being produced in the first half of 2021 than had been intended.”
The possible interest rates increase would not make money more expensive to borrow, but also result in restraining consumer spending and could, overall, affect retail stocks as well as many other sectors of the economy.
