The International Monetary Fund (IMF) has warned of further selloff of stocks in the US, particularly in highly valued sectors, in the wake of a sudden and substantial rise in interest rates.
The US equity market started the year with a steep retreat amid growth uncertainty, threats of high inflation and weaker earnings prospects despite performing exceptionally well last year, according to an IMF blogpost.
“As a result, we expect that a sudden and substantial rise in real rates could cause a significant drop for US stocks, particularly in highly valued sectors such as technology," senior IMF officials Nassira Abbas and Tobias Adrian wrote in the blog on January 27.
In January this year, the US 10-year real yield has already seen a nearly half a percentage point rise, they said. Meanwhile, S&P 500 tumbled over 9 percent for the year and the Nasdaq Composite measure fell 14 percent on the back of greater investor nervousness.
The Federal Reserve on January 26 hinted at hiking interest rates by as early as March to combat surging inflation rates. The tightening of the monetary policy could trigger an adjustment in real interest rate and lead to higher discount rate and lower stock prices, the IMF officials said.
Highlighting elevated financial vulnerabilities, the IMF said monetary authorities should give a clear guidance about its future policy stance to safeguard financial stability and avoid unnecessary volatility.
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Monetary policy tightening can also impact crypto markets, which have shown a correlation with traditional financial markets and also witnessed a major sell-off since the beginning of 2022, Adrian told CNBC.
Earlier, the IMF had warned that the Fed’s interest rate hike and policy tightening will hamper economic recovery in Asia. Capital flows in several emerging economies have already taken a hit in the past three months and could further slow down in the future, Adrian said.
(Edited by : Shoma Bhattacharjee)
First Published: IST