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Wednesday, October 5, 2022

Investors may fall into the Fed’s trap

Leading US indices World Nation NewsJones, NASDAQ and S&P 500 closed higher on Monday. We believe the current behavior of investors is illogical, as there were practically no reasons to buy US shares. However, there may be several scenarios that explain the events currently taking place in the stock market. In the first case, this is just a trap for buyers. The current growth is artificial. Most likely, they will end with new strong sales at better prices than a few weeks ago. In the latter case, the market is full of optimism, as inflation fell to 8.5%. Therefore, he believes that the Fed will no longer aggressively raise the base rate. In any case, there were no reasons for active purchases. Even if the US regulator announces a 0.5% rate hike in September, it would still be an aggressive move. Moreover, it will take a long time for the interest rate to reach 4-4.5%. Finally, we can observe the outflow of capital from Europe to the US. While US investors may be slow to buy stocks and indices, European investors may be throwing money into them at a time of strong fears of a recession in the European Union. Recall that now it is the EU that can boast of positive GDP growth, which is easily explained. Unlike the Fed, the ECB does not raise interest rates.

Either way, we will see the US stock market crash at least once this year. Otherwise, there will be a curious paradox when the money supply in the US decreases, interest rates rise, the economy is on the verge of recession, and the stock market rises. However, many FOMC members stress the importance of raising rates faster to bring inflation back to 2% as quickly as possible. The next inflation report, due just a week before the FOMC meeting, will of course answer many questions, especially whether there was an accidental fall in inflation in July. In May, the consumer price index also fell, but then rose again. If the September report shows another significant decline, then the Fed may reduce the pace of rate hikes. But even in this case, the rate will still be raised, which is a negative factor for the stock market. According to Bank of America, a huge number of shares are now in the hands of households, and these households have not participated in the sale for six months. Historically, several bearish trends have ended after strong household sell-offs. A number of other indicators signal a continuation of the downward trend.

Article author: Instaforex team

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World Nation News Desk
World Nation News Deskhttps://worldnationnews.com/
World Nation News is a digital news portal website. Which provides important and latest breaking news updates to our audience in an effective and efficient ways, like world’s top stories, entertainment, sports, technology and much more news.
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