In Europe, the gas crisis intensifies on the eve of winter. The US Federal Reserve is ready to cut its balance sheet

August 10, 2022

The US stock indices were trading lower yesterday ahead of the inflation data, indicating that investors were probably closing their positions before the important report. At the close of the stock market yesterday, the Dow Jones Index (US30) decreased by 0.18%, and the S&P 500 Index (US500) was down 0.42%. The NASDAQ Technology Index (US100) fell by 1.19%.

The Fed’s balance sheet reduction plan, known as quantitative tightening (QT), will begin in full force in September. The Fed will begin reducing the balance sheet with $95 billion monthly cuts ($60 billion in Treasuries and $35 billion in mortgage-backed securities). But analysts believe the US Central Bank will have to wind down some of its aggressive monetary tightenings as early as next year as it begins cutting rates to fight the economic downturn. Bank of America estimates that if the Fed pauses QT in September 2023, the Treasury will probably have $630 billion less debt for the public in the fiscal year 2024. Fed Chairman Jerome Powell said last month that the Central Bank’s model “Suggests that it could take two to two and a half years” for the balance sheet to come to a “New equilibrium.” The balance sheet more than doubled during the pandemic, to $9 trillion earlier this year, as the Fed again used quantitative easing as a crisis-fighting tool. But there is an alternative view. Some analysts believe the US Fed will have to raise rates to 5% in 2023 and stay at that level because of tight inflation to get room to lower interest rates in 2024 and again resort to increasing the balance sheet by turning on the printing machine.

Micron Technology (MU) projected negative free cash flow in the second quarter due to falling revenue as lower PC and video game sales are expected to impact chip demand. The company’s stock is down more than 4%. Norwegian Cruise Line (NCLH) reported second-quarter results that fell short of Wall Street expectations and provided gloomy forecasts, predicting that occupancy levels won’t return to pre-pandemic levels until next year. Rival Royal Caribbean Cruises (RCL) and Carnival (CCL) are down more than 5%.

Tesla CEO Elon Musk sold $6.9 billion of Tesla stock, citing the high likelihood of a forced deal with Twitter. Musk broke off an April 25 agreement to buy Twitter for $44 billion in early July. Twitter sued Musk to force him to complete the transaction, dismissing his claim that he had been misled about the number of spam accounts on the social media platform. Both parties will appear in court on October 17.

Stock markets in Europe traded flat on Tuesday. Yesterday German DAX (DE30) fell by 1.12%, French CAC 40 (FR40) lost 0.53%, Spanish IBEX 35 (ES35) gained 0.48%, British FTSE 100 (UK100) closed on the plus side by 0.07%.

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A famous German aluminum factory is preparing to shut down due to the growing gas crisis in Europe. Costs have doubled this year, causing the plant to idle one week a month to save gas. The price of gas contracts for Europe has nearly tripled since the beginning of the year due to Russia’s invasion of Ukraine, sanctions against Russia, a slowdown in Russian gas supplies through Nord Stream 1, and global market tensions. Germany’s energy regulator is urging companies, the government, and consumers to reduce gas consumption and has asked major firms to submit contingency plans to reduce consumption during the winter further.

Gold prices are strengthening ahead of a key inflation report. Gold is getting support as a safe-haven asset as stock indices decline along with the Dollar Index. Investors expect a decline in the rate of inflation in today’s report. But if the data is worse than expected, the dollar index could get a boost, negatively affecting the prices of precious metals.

Oil prices fell on Tuesday as market participants compared last week’s potential stockpiling in the US with news that exports of some oil via the “Druzhba” pipeline from Russia to Europe, which runs through Ukraine, have been halted. Russian pipeline monopoly Transneft said Ukraine had suspended crude through the pipeline because Western sanctions prevented Moscow from paying transit fees. The news, however, was offset by reports of new progress in nuclear talks with Iran, which could bring 500,000 to one million barrels a day to the market if Tehran frees itself from sanctions imposed on its oil over its suspected nuclear weapons development.

Asian markets traded flat yesterday. Japan’s Nikkei 225 (JP225) fell by 0.88%, Hong Kong’s Hang Seng (HK50) lost 0.21%, and Australia’s S&P/ASX 200 (AU200) was up by 0.13% by the end of the day.

China’s annual Consumer Price Index was slightly lower than expected at 2.7% instead of 2.5%. Meanwhile, the Producer Price Index, which shows the factory inflation rate, fell sharply from 6.1% to 4.2%. The easing of price pressures in China may reflect the sluggish performance of the domestic economy due to continued Covid-19 lockdowns in major commercial centers hampering activity.

S&P 500 (F) (US500) 4,122.47 −17.59 (−0.42%)

Dow Jones (US30) 32,774.41 −58.13 (−0.18%)

DAX (DE40) 13,534.97 −152.72 (−1.12%)

FTSE 100 (UK100) 7,488.15 +5.78 (+0.077%)

USD Index 106.32 −0.12 (−0.11%)

Important events for today:

– Japan Producer Price Index (m/m) at 02:50 (GMT+3);
– China Consumer Price Index (m/m) at 04:30 (GMT+3);
– China Producer Price Index (m/m) at 04:30 (GMT+3);
– US Consumer Price Index (m/m) at 15:30 (GMT+3);
– US Crude Oil Reserves (w/w) at 17:30 (GMT+3).

By JustForex

This article reflects a personal opinion and should not be interpreted as an investment advice, and/or offer, and/or a persistent request for carrying out financial transactions, and/or a guarantee, and/or a forecast of future events.

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In Europe, the gas crisis intensifies on the eve of winter. The US Federal Reserve is ready to cut its balance sheet