Markets can handle a hawkish Fed, but not uncertainty

Skip to Content News Archives Economy Energy Oil & Gas Renewables Electric Vehicles Mining Commodities Agriculture Real Estate Mortgages Mortgage Rates Finance Banking Insurance Fintech Cryptocurrency Work Wealth Smart Money Wealth Management Investor Personal Finance Family Finance Retirement Taxes High Net Worth FP Comment Executive Women Puzzmo Newsletters Financial Times Business Essentials More Innovation Information Technology FP500 Podcasts Small Business Lives Told Tails Told Shopping Financial Post Store Obituaries Place a Notice Advertising Advertising With Us Advertising Solutions Postmedia Ad Manager Sponsorship Requests Classifieds Place a Classifieds ad Working Profile Settings My Subscriptions My Offers Newsletters Customer Service FAQ News Economy Energy Mining Real Estate Finance Work Wealth Investor FP Comment Executive Women Puzzmo Newsletters Financial Times Business Essentials This advertisement has not loaded yet, but your article continues below.HomeNewsEconomyMarkets can handle a hawkish Fed, but not uncertaintyWhile the prospect of a year-end rally is well alive, getting there may not be easyAuthor of the article:The Fed decision can be seen as a clearing event, with investors’ cautious turn heading into last weeks' policy meeting showing they were far from complacent. Photo by JIM WATSON/AFP via Getty ImagesBetter clarity about the United States Federal Reserve’s resolve to fight inflation is giving investors reason to be bullish, and yet risks associated with oil prices and artificial intelligence keep them from fully committing.THIS CONTENT IS RESERVED FOR SUBSCRIBERS ONLYSubscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman, and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.SUBSCRIBE TO UNLOCK MORE ARTICLESSubscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.REGISTER / SIGN IN TO UNLOCK MORE ARTICLESCreate an account or sign in to continue with your reading experience.Access articles from across Canada with one account.Share your thoughts and join the conversation in the comments.Enjoy additional articles per month.Get email updates from your favourite authors.THIS ARTICLE IS FREE TO READ REGISTER TO UNLOCK.Create an account or sign in to continue with your reading experience.Access articles from across Canada with one accountShare your thoughts and join the conversation in the commentsEnjoy additional articles per monthGet email updates from your favourite authorsSign In or Create an AccountThe Fed last week succeeded in restoring its credibility, showing that it’s not falling behind the curve with a hawkish message that still stopped short of signalling an aggressive hiking cycle. While that was at first enough to soothe markets, nerves remained evident Friday as the 10-year Treasury yield again tested five per cent and the S&P 500 fluctuated between gains and losses. While oil prices have pulled back, Brent crude is still trading above US$100 a barrel.“It is difficult to see rates and equities fully stabilizing until energy-related inflation pressures ease,” said Barclays PLC strategists led by Emmanuel Cau. “Nevertheless, the positive development is that Fed independence and credibility have been reaffirmed, providing clarity on its reaction function.”SUBSCRIBER EXCLUSIVE: FP West: Energy Insider brings you behind the oilpatch’s closed doors with exclusive insights from insiders every Wednesday morning.By signing up you consent to receive the above newsletter from Postmedia Network Inc.A welcome email is on its way. If you don't see it, please check your junk folder.The next issue of FP West: Energy Insider will soon be in your inbox.We encountered an issue signing you up. Please try againThe Fed decision can be seen as a clearing event. Investors’ cautious turn heading into the policy meeting showed they were far from complacent, with clear signs they had reduced exposure while adding hedges. Friday’s massive quarterly expiry also went a long way toward resetting options positioning.“With earnings growth robust, credit spreads contained and the VIX subdued, U.S. equity fundamentals remain supportive, leaving us constructive on the S&P 500 beyond near-term volatility,” said Societe Generale SA strategist Manish Kabra. The yield curve remains a key signal and as long as inversion is avoided, Kabra expects the benchmark to hit 8,000 by year-end, despite some volatility.While the prospect of a year-end rally is well alive, getting there may not be easy. Diesel prices are pointing to higher inflation ahead, and unless the war in Iran is resolved swiftly enough to bring oil prices down significantly, the central bank may have little choice but to turn even more hawkish.Another three rate hikes are priced in by the end of July, according to the swap market. All eyes will be on a potential bond shock, with 10-year yields above five per cent making Treasuries increasingly attractive. Yet as long as economic and earnings growth remain resilient, investors may be reluctant to shift from equities and rather continue broadenening their exposure.Bank of America Corp. strategists led by Jared Woodard have become more cautious, saying positioning is still too bullish given next year’s expected moderation in earnings. They said the 10 per cent-15 per cent growth seen for 2027 implies an ISM manufacturing reading above 53 for a sustained period of time. It’s “not yet time for defensives, but quality, value, and yield look prudent,” they said.The market has become more skeptical about AI spending and the future returns on those investments. This has cast some doubt on the earnings outlook for the entire chain of AI beneficiaries. Meanwhile, there’s been a rotation within the technology sector, with software coming back stronger, while semiconductors have largely stalled in the past two months and turned increasingly volatile.This advertisement has not loaded yet.This advertisement has not loaded yet, but your article continues below.Valuations have come down sharply in the S&P 500 and the benchmark now trades just above its long-term average. While the de-rating has more to do with surging earnings estimates, the recent pullback shows investors are not prepared to pay up for growth, whether at the index or sector level.If caution remains in the near term, an expectation-beating earnings season in a few weeks time has the potential to revive sentiment and risk taking.“The resilience suggests investors are distinguishing between higher rates driven by persistent inflation and a fundamentally deteriorating growth outlook,” said Daniela Hathorn, senior market analyst at Capital.com. “For now, the latter has not become the dominant concern.”We apologize, but this video has failed to load.Notice for the Postmedia NetworkThis website uses cookies to personalize your content (including ads), and allows us to analyze our traffic. Read more about cookies here. By continuing to use our site, you agree to our Terms of Use and Privacy Policy.