Market Performance Signals Optimism Despite Rate Hikes

Last week, the financial markets witnessed rate hikes by both the Reserve Bank of Australia (RBA) and the Bank of Canada (BOC). These moves were motivated by the ongoing battle against inflation.

Despite a lack of other significant economic data releases, the global markets showcased interesting trends, including a steady rise in yields in the US, positive performance in equities, and improved market sentiment.

Surprise Rate Hikes: RBA and Bank of Canada Take Action

In a surprising turn of events, the RBA and the BOC implemented rate hikes to combat rising inflation. The RBA increased its rates to 4.1%, while the BOC raised its rates to 4.75%. These decisions were primarily driven by concerns over inflationary pressures and the need to maintain price stability. Both central banks aim to manage economic growth and prevent excessive inflation from impacting their respective economies.

Market Response: Steady Rise in Yields and Mortgage Rates

Price action remained similar to last week. The US market witnessed a gradual increase in yields, while European yields remained relatively flat. Notably, US mortgage rates inched closer to recent highs, with the average yield on a 30-year jumbo mortgage reaching 6.9%. Investors and homeowners should closely monitor these developments as mortgage rates play a crucial role in the real estate market and consumer spending.

Equity Market Performance: Marching Forward

Global equities maintained their upward trajectory. The mid-cap and value index in the US, represented by the Russell 2000, delivered a robust performance with a 4.5% increase. Meanwhile, the S&P and Nasdaq indices experienced marginal gains, consolidating the strong upward movement observed in recent weeks. European markets, on the other hand, remained relatively flat. Asian markets, particularly Japan and China, performed well, with gains of 1% and 2%, respectively.

Market Sentiment and Indicators: Optimism Abounds

Two key market indicators – the CBOE Volatility Index (VIX) and the CNN Fear and Greed Index – shed light on the current market sentiment. The VIX is down to levels not seen since before the global Covid-19 pandemic. The CNN Fear and Greed Index has now entered the "extreme greed" territory.

These indicators mirror the view of the market’s participants, who seem to remain focused on the upside potential while discarding downside risks. Though not a stable scenario, in the absence of a catalyst, it could persist.