Serious situation of the first 3 months for the capital markets

The fundamental problem is more related to the “large excess liquidity” that the Federal Reserve (Fed) generated over two years and that almost doubled the size of its assets (balance sheet). The doubt that the market now has is related to the times, objectives and speed to carry out its monetary restriction process.

Over the last few years, it seemed that the American stock markets would not have a brake despite the high valuations of many companies, especially technology companies. For example, the price/earnings of the Nasdaq at the close of February 25 reached 99.9 times (Multiples and Financial Indicators of GF Banorte) at a time when the yield in 2022 until that same date registered a drop of 13.9 percent. At higher levels, it traded more than 100 times.

However, the stock markets are falling and the US economy is maintaining good dynamism and will continue to grow above its average for the last five or 10 years. Various institutions estimate that the economy of the United States could grow between 3.5 and 4.5%, with which it is still relevant and, in addition, it will be the main country that makes the greatest contribution to world growth, surpassing China for the second year.

However, the fundamental problem we see is more related to the “huge excess liquidity” that the Fed generated over two years that almost doubled the size of its assets (balance sheet). Now, with this need to control the level of inflation not seen in the last 40 years, it is forcing the Fed to carry out two actions that will be starting between next March and May in its monetary policy decision meetings.

The first is to start with the increase in interest rates and the second will be the reduction of its assets, which is the withdrawal of this excess liquidity through the sale of treasury bonds and mortgage-backed bonds. The doubt that the market now has is related to the times, objectives and speed to carry out its monetary restriction process.

On the interest rate side, hikes are beginning to be managed in the year from 100 basis points (bp) and up to 150 bp in 2022 and even more for 2023, although the war issue in Ukraine could moderate the Fed's decisions.

At first it was thought that they would be gradual movements of 25 bp, but now, the possibilities of movements of 25 or 50 points are increasing depending on the conditions with a target on rates between 2022 and 2023 that range from 1.25% to 2.50% per year. In our analysis from 2020 to date, there is an 80 to 100% correlation between the size of the Fed's balance sheet and inflation, so asset reduction will be more "efficient and effective." ” in the fight against inflation, but it must be accompanied, without a doubt, by the rate of increase in interest rates.

To the scenario of monetary restriction that over the last 11 years they did not have in that tense of inflationary pressure like now, we must add the Russia-Ukraine geopolitical risk that has come to put even more pressure on the prices of raw materials such as oil, gas, gasoline, food and some metals that increase the pressure on the central banks of the world's largest economies.

Fortunately, the health issue with the Covid-19 pandemic seems to be losing ground to a greater extent. Advances in vaccination in developed countries, and some emerging ones, to 70% of the population with a full dose (two doses in authorized vaccines) and some progress in reinforcing it, is helping to increase the hospitalization and mortality rate increase to a lesser extent and economies remain open, especially in the United States.

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