The current equity slump seems to be steeper than the bulls could have imagined. As I pointed out in December, the growing noises from the Fed’s on its plan to temper inflation might spark an equity sell-off, but traders overlooked the first signal of exhaustion in the S&P 500 futures.
Once again, I pointed out the upcoming equity sell-off on Jan. 2, 2022.
But the equity bulls were busy ignoring every reason that might spark an equity sell-off. Undoubtedly, the pandemic has been consistently damaging the economic recovery and that could continue to be the main reason for the current equity sell-off which started on New Year's eve.
Second is the Fed’s fear that there may be some misbalance between growth and inflation. This fear could continue to drag down the global equity indices to test new lows.
Undoubtedly, the current equity sell-off could continue to impact precious metals, cryptocurrencies, and commodities.
The third reason which added one more leg to this equity sell-off is the growing geopolitical tension between Russia and the West. A build-up of Russian troops on Ukraine's border has triggered fears in the West that Russia will invade. NATO said on Monday that they were putting forces on standby and reinforcing Eastern Europe with more ships and fighter jets.
The New York Times and others reported that President Joe Biden is considering the dispatch of up to 50,000 combat troops to Ukraine, while the UK – whose government warned at the weekend of Russian intentions to install a puppet government in the country after invading - has reportedly sent some 2,000 anti-tank launcher system to Ukraine.
The Federal Reserve began its two-day meeting on Tuesday and expected to give guidance about the trajectory of monetary policy tightening, with investors expecting the first post-pandemic U.S. rate hike in March.
Undoubtedly tightening monetary policy typically hurts riskier assets, such as equities, and makes government bonds more attractive to investors.
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