3 reasons why financial markets are going down?
Almost all the markets are down right now. Be it NASDAQ, DAX, Sensex, HangSeng index or Crypto markets.
There are 3 reasons why financial markets are bleeding:
- Ukraine Russia crisis: The war started almost a month ago and still continues. There is no end in sight and negotiations have not given any concrete results so far. In such war-like situations, due to geo political tensions, the markets will continue to perform badly. The war is impacting one of the most important commodities – Oil. Not just oil but many other commodities will be severely impacted. Volatility of oil prices and disruption of supply chains will lead to food inflation in most parts of the world. Overall, for the most part of 2022, the Ukraine Russia conflict will impact most of the asset classes across most of the geographies.
- Fed fund rate hike: US has been facing inflation over the years. Not just US, most of the markets are facing high inflation – partly due to bad monetary policies and partly due to COVID. The real inflation in US may be much higher than the reported 7.9%. When it comes to raising rates, 2022 is the most crucial year. This is because for the last 2 years almost all the central banks avoided raising interest rates due to COVID. When interest rates will rise this year, risky asset classes such as equity or crypto will become less attractive. There are 6 to 7 rate hikes planned in 2022. How many rate hikes are implemented is difficult to say as this will depend also on number of other factors but for sure, from Fed’s perspective, the time to end Quantitative easing has come. Therefore, for most part of 2022, interest rate hikes will weigh on the market and thus affect most of the asset classes.
- COVID: Due to the ongoing Ukraine Russia war, media is focusing less on COVID and more on the war. But that doesn’t mean that COVID is already over. Delta variant in 2021 took toll of millions of lives. China is again facing new wave of COVID and many parts of China are under lockdown. With Omicron, the effects of COVID have started to fade in most parts of the world, so hopefully things will be better in China soon. In case COVID completely ends this year, that will be a big relief. But in case of new unexpected variants and further lockdowns in 2022, markets will be impacted.
Of these 3 reasons, the first 2 will play more important role than the 3rd one.
Do you agree with these reasons?
What else might impact the financial markets? Please comment below.