Knock-on effect

With the easing policy tendency receding, the weakest link would be the first to get impacted. After US, as the strongest economy, began bigger-than-expected interest rate hike, the impact would be more manifested by its knock-on effect.

Consequently, investors were short selling in stocks, bond and exchange rate markets in Japan and Europe, and Japan government bond futures collapsed. US dollar to Japanese yen exchange rate rose to break 135 and reach 139. The difference between the yield on the 10-year benchmark Germany government bond and its Italian equivalent widened to 2.4 percentage points. Italian Prime Minister Mario Draghi said on Jul 12 that he would resign, which also raised concerns about crisis in Europe.

The strengthening of US dollar came as a result of interest rate hiked, and also the worse situation in Europe and Japan. Since of outbreak of Russia-Ukraine conflict, Europe has been mired in energy crisis, with inflation soaring. On Jul 11, Russia announced to shut Nord Stream 1 natural gas pipeline for 10 days. The market concerned that the pipeline may not reopen and the panic exacerbated. Afterwards, euro fell to parity with US dollar.

US announced on Jul 13 that its Jun CPI beat expectation to 9.1%, and the market expected Fed to raise interest rate by 100 basis points in Jul, which triggered another round of market slump.