Fear of Federal Reserve stimulus withdrawal shakes Wall Street

turmoil in the markets

Tensions in Ukraine trigger gas prices and sink European stock markets

Lalo Augustine

Barcelona

The market does not support uncertainty, the worst enemy of investors, and acts accordingly. And yesterday was very well served doubts. The main one, although in Europe the serious political crisis over Ukraine seems to weigh more heavily, is what the US Federal Reserve will announce after the two-day meeting that begins today. A first rise in interest rates is ruled out, which will foreseeably take place in March and will be followed by at least three more rises this year.

What worries investors now is the intensity and timing of the tapering, the withdrawal of stimuli that should lead to a thinning of the Fed's balance sheet, which is now close to nine trillion dollars, 38% of GDP. Since the beginning of the year, the tough talk of Jerome Powell and his team of governors due to rising inflation and the need to combat it has caused Treasury yields to rise – hitherto very low, like interest rates. – and a reallocation of assets. The massive sales began by affecting the shares of the big technology companies and other values ​​that were very expensive, but at the moment, with doubts about the path that the Fed will follow, they have already spread to the entire market.

I know Cardona is being confirmed today and there are a lot of very important topics to tweet about, but I just nee… https://t.co/qnGqeOG8Z8

— Geri Chaffee Wed Feb 03 19:48:10 +0000 2021

Bag

The Ibex erases all the gains made at the beginning of the year after falling more than 3% on the day

Yesterday, Wall Street sank during a good part of the session, although the storm subsided when facing the closure and ended up positive. Even so, the temporary fall of the S&P 500, the most representative, caused the index to mark at times the worst start to the year in almost a century, according to data from Bloomberg, with a decline of more than 10%, which indicates that it is in correction phase. The Nasdaq also fell 4%, its worst decline since March 2020, when the declaration of the pandemic, and that led it to be around 15% below its previous maximum and close to the 20% that would imply its entry into a bear market.

“From a markets standpoint, 2022 is a disaster, at least so far,” Tim Ghriskey, senior portfolio strategist at Ingalls & Snyder in New York, told Reuters before the dust settled. "It's a continuation of the same problems: the uncertainty about the Fed and now the outbreak of the Ukraine problem," he added.

Although corporate profits, in the middle of the round of presentation of results, continue to be robust, investors are beginning to discount that financing conditions will begin to worsen for everyone. A measure of credit risk in the United States jumped yesterday to the highest level since November 2020, for the seventh day in a row. That is why so many eyes are on what the Fed decides.

Lagarde defends a slower pace of withdrawing stimulus than the Fed

In Europe, the rhythms of the central bank are very different, but the political crisis with Russia creates great instability in the region in all areas. Energy is one of them. Yesterday, natural gas futures jumped 20%, on the risks that the supply would be seriously affected in case the escalation spills over.

This uncertainty, together with that from the Fed's actions, turned the stock markets red. The money took refuge in some of the theoretically safer ports, such as the Swiss franc, which was exchanged at a maximum of six years against the euro, and penalized the rest. The Eurostoxx fell 4.1%, like the rest of the main markets on the continent. The Ibex approached that level of losses in the early afternoon and closed at 8,417 points, 3.2% less than on Friday. It has already lost 3.4% since the year began.

Strategies

Money flees risk assets such as bitcoin and takes refuge in the Swiss franc, which shoots up

Volatility is skyrocketing around the world. Oil was down 2% yesterday, and cryptocurrencies literally went on a roller coaster ride. Bitcoin fell as low as $33,000, half that of its highs last November, although last night it went back to previous values ​​on Sunday.

This will be, according to experts, the dynamics of the coming days or weeks. Until there is greater visibility on the concrete implications of US monetary policy and the drift of events in Ukraine, everything will be on the wing.