Tuesday’s trading was a cold shower for bulls in almost all global markets. Why the fall? Maybe on increased escalation between China and Taiwan? Tightening lockdowns in some countries around the world? Perhaps the market was severely overheated?
The reason for sell-offs of all kinds of assets was the words of US Secretary of Economy Janet Yellen.
“Rates could rise to stop the economy overheating”
This seemingly innocuous phrase was enough to send stocks plummeting. Let’s get to the bottom of why that happened.
Traders who closely follow the rhetoric of the Fed leadership are well aware of the following. This body can claim white is black for a very long time, and then change its mind completely in just 1-2 weeks.
In this case the situation is repeated. The Fed chairman claims that dollar inflation is virtually non-existent. Or it is so low as to be negligible. This means that rates will remain low for a long time to come. It also means that every month new, unsecured money will be injected into the economy. However, it is true that it hardly ever reaches the economy, it is fed directly into the stock exchange.
But what if you ignore the words of the Federal Reserve Chairman and look at the situation with your own eyes? A very different picture emerges. The prices of many manufactured goods have doubled in a year. And that’s with a massive drop in production due to the COVID-19 epidemic.
How quickly will this be reflected in consumer inflation? There is a time lag due to the production cycles of individual companies.
However, it is clear that if a car manufacturer buys metal at twice the price, the cost of production will increase anyway. And so it is on all counts.
On May 4 Yellen just said what everyone already knows. It is a trial balloon thrown by the US leadership for 2 purposes. To see the reaction of the stock markets. And also to prepare the ground for winding down the massive injection of unfunded money into the economy.
10.00 EU Composite Manufacturing Index for April
14.15 ADP US private sector employment report for April
16.00 US ISM service sector activity index for April
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