2022/04/24 (031) Column

Powell’s power words unnerved US stock market bulls
War in Eastern Europe and or US monetary policy
determine the direction of the stock markets


In the past, shortened trading week (after the Christian Easter weekend and/or the Jewish Passover festival), the German stock exchanges again experienced a roller coaster ride. While in the middle of the week it was above all positive indications on the US stock exchanges that provided an upward momentum, last Friday the stock markets went down steeply. This was once again triggered by concerns about noticeably rising interest rates in the USA. The head of the US Federal Reserve, Jerome Powell, spoke last Thursday about a possible large interest rate hike at the Fed’s meeting in early May. In the USA as well as in Germany, the yields of the government bonds therefore increased noticeably, which makes them more attractive in perspective, which is why shares naturally suffer from this development – since there will be a safer interest-bearing offer again. The presidential run-off election in France also caused nervousness after polls showed that Marine Le Pen’s chances had improved. And thus the uncertainty in the past calendar week also received additional nourishment, since it was admittedly assumed that Macron would be re-elected unspoken. But of course, of course, had no guarantees until Sunday evening.

Powell’s power words unnerved US stock market bulls

The US stock exchanges fell noticeably more easily in the past week. Above all, rising interest rate fears in the USA, which again came into focus at the end of the trading week, according to some statements by US Federal Reserve Chairman Powell, ensured that shares became noticeably cheaper. The Dow Jones index lost 1.9 percent in a weekly comparison to 33,811.40 points. The broader S&P 500 index fell 2.8 percent to 4,271.78 points. And the technology-heavy Nasdaq 100 index even dropped 3.9 percent to 13,356.87 points.

War in Eastern Europe and/or US monetary policy determine the direction of the stock markets

New week – and stresses that are becoming increasingly clear (but have been known for days and weeks, as already described several times in earlier issues): The Ukraine war and the associated economic consequences for us in the so-called West, on the one hand, and or also inflation, which is moving towards 10 percent due to the restrictive corona measures organized by the state and the associated expansive monetary policy, is likely to have a significant impact on the mood on the stock market. And thus, more or less, sooner or later, the prices will also (un)rightly be driven up/down. Any new information on these issues should have a direct impact on WallStreet traders’ positive/negative sentiment. In addition, the further development of the corona pandemic in China and its effects on the market price development on Wall Street should also have an impact. An additional stress factor was resolved this weekend, however, with the victory of Emmanuel Macron (in the runoff election for the French presidency). So that the result should have little impact on both the foreign exchange market and the bond market, let alone the stock market.

If the FED tightens the reins of runaway inflation too quickly and too much, then there is a danger that not only will inflation fall, but rather that the US economy will fall to its knees – and thus, sooner or later, more or less, before that also the US stock market. And that’s the deep tune the US stock market is singing bearishly right now. And or the US yield curve is obviously bullish.

On Thursday, the Fed, in the form of Jerome Powell and Jim Bullard, said for the first time that the US Federal Reserve is no longer the friend and helper of the stock markets, but rather the friend and helper of rising yields! And that’s a good thing – for fighting inflation, for the US economy! But no longer primarily for the US stock markets. A Greenspan Put, and or even Helicopter Ben, as in the previous decades, is currently not worth thinking about (at least for US stock market bulls).

Because the Fed wants to tighten the “financial conditions” to combat inflation. And that means a rising US yield curve (interest rates) on the one hand – and falling real estate prices on the other. Whereby stock markets also tend to fall, more or less, faster or slower, in such phases, before they recover at least as much. Hence the bearish mood on the US stock market and/or a bull party on the US yield curve. And the great horror of many observers – since most of them have gotten used to the monetary policy of the FED since 2008 and the reaction of the US stock market due to full liquidity. But that seems to be over for now – if the FED should start raising interest rates by more than 25 basis points. And that is reflected in a high bullish volatility in the US yield curve as well as high bearish volatility in the US stock market on a daily basis.The US Federal Reserve is sitting on a powder keg

High inflation can only be actively defeated with even higher key interest rates. And or you have to sit it out passively (with a lower key interest rate than the inflation rate). Which is why the hawkish verbal power word from US Federal Reserve President Powell, in terms of interest rate hikes, can also be appropriately described as playing with matches, on the powder keg, US securities market! If you want it? Because it is the combination of excessive private debt, as well as US government debt, as well as sky-high valuations on Wall Street, including gigantic derivatives volumes, which I also sometimes trade (buy/sell) from time to time, which is an already sharp time bomb can cause an explosion. But the FED boss and his colleagues know this best themselves. At least that’s what I’m assuming. But I know what he and the FED will decide at the next regular meeting in the first week of May, the financial market does not (yet) know! Which is why the US Yield Curve tends to be traded bullishly at the moment. And or the US stock market is currently tending to be bearish…