Are you worried about the stock exchange? Central banks all around the globe are losing their fight against inflation. This could mean that the global economy will plunge into recession.
Step back: Last Week, the Federal Reserve raised its interest rates by 34 a point. This was the highest rate increase since 1994. The Bank of England also raised its target rates for the fifth straight month, as it did in December. In addition, the Swiss central banking increased rates for only the second time in 15 years.
They’re difficult to do. The BOE stated that the fall would see inflation increase to close to 11%. Meanwhile, the Fed increased its inflation forecasts for 2022 by a full point. Jerome Powell, Fed Chair said last week that there’s still hope the US economy will avoid recession. But he admitted that Russia’s invasion, the ongoing pandemic, the supply chain, and energy crunches have “highlighted difficulties and created great problems… so it’s impossible to know.”
Investors are being rattled by central banks and the Fed’s decision to pull back stimulus and reverse the monetary policy engine. The US stock exchange has entered a bear market. Wall Street’s worst week in March 2020 was marked by a drop of almost 6% in the S&P 500 and a plunge of approximately 1,504 points for about 5% in the Dow.
Stocks in the US have fallen 23% from January’s record high. But they have room for more falls, especially if runaway price increases cause a slowdown in the economy.
Anthony Saglimbeni of Ameriprise Global Market Strategy stated that the Fed could be willing to push the economy into a recession in order to bring down inflation.
“I think it was in investors’ minds but now it’s front-and-center. He added that stock markets will struggle until they can figure out the Fed’s final point.
Investors are not always well-treated by recessions. According to Sam Stovall from CFRA Research, chief investment strategist, bear markets during recessions have been historically longer than the bear market that wasn’t associated economically with downturns. Stocks have fallen 28% during bear markets that aren’t associated with recessions, and 36% during recessions since World War II.
Inflation can prevent people from spending and hurt companies’ bottom line. Wall Street analysts are predicting a recession, but stocks can still be expensive if the past is any guide. Stovall projects that the S&P 500’s bottom will be at around 3,215. This is a decrease of 33% from peak to trough based on historical price-to-earnings ratios.
Even analysts that aren’t forecasting a drastic decline believe stocks still have some room to fall. Keith Lerner is a chief market strategist for Truist Advisory Services and believes the S&P 500’s bottom will be at around 3,400. That’s 7.5% less than Friday’s close.
Lerner stated that this would make an already brutal market feel worse. “And, of course, markets could reach beyond the average.”
C. e The tools they used in previous recessions can’t be relied on by central banking. In order to stimulate the economy, the Fed and other central banking institutions have in the past cut rates and created enough money to buy up debt. They cannot control many things, including commodity prices, fuel costs, and supply chain difficulties, which can cause inflation to moderate in a recession.
The possibility of lower rates could increase inflation, thereby reducing any price moderation that we might have gotten from an economic downturn.
The good news is if you want to call it that, most economists predicting a recession anticipate a much less severe downturn than the collapse of the early ’80s. And stocks could have suffered so much by the end that any sign that the Fed is easing up rate hikes or moderating inflation may cause the market to rebound.
Trust’s Lerner says that the “best thing for stocks right at this moment is, given low sentiment, a bit of good news might go a long way.” Truist notes that bear markets tend not to last as long as bull markets and stocks often bottom out months before a recession ends. Another reason to be optimistic? The stock market returns on average 40% to investors every year after a recess.
China is buying a lot of Russian oil
Despite the West’s efforts, Putin has continued to sell his country’s oil despite being punished for Russia’s invasion. Moscow’s taps remain open, and money continues to flow into Moscow for a variety of reasons: a lack of alternative supplies, surging prices, and willing buyers in other parts.
The outcome: Russia’s economic situation, though in deep decline, has managed to avoid the crisis many West-based economists had hoped for.
This week data from China’s General Administration of Customs revealed how difficult it is to cut off Russia’s main lifeline. The administration reported China imported 55% of Russian oil last Month than on May 20,21. And Russia has replaced Saudi Arabia as China’s top-selling oil supplier.
China’s largest oil exporter, the Saudis, has been China’s number one for 19 months straight. Russian crude oil has been heavily discounted in China’s search for buyers. China isn’t willing to accept bargain-basement pricing at this time of historically high energy prices. India has also increased its imports of Russian oil.
The European Union is now phasing in an embargo covering 90% of Russia’s oil. However, it has another way to limit Moscow’s options: A ban preventing ships carrying Russian oil from being insured. This would make Moscow less likely to divert hundreds of thousands of barrels to India and China every day.
Julia Horowitz of the European Union reports that EU companies won’t be able to finance or insure Russian oil transportation after a transitional period of six months. Russia might find it more difficult to find ships that are willing to load its crude.
This may not be the easiest thing: The EU rule could raise crude oil prices even higher. This is something politically fragile Western politicians, including Joe Biden, don’t like.
Russia has also benefitted from the higher crude oil prices. The possibility that the insurance ban will send prices higher could partially offset any pain this new rule could cause.
Libyan oil struggle
As if there were more bad news on crude prices, Libyan’s oil industry has been in disarray. The country is now pumping less oil per year than it did last year, even as the rest of the globe scrambles for new energy sources.
Some unreliable government reports about oil production have resulted from conflict in the country. Nadeen Ebrahim, my colleague reports that the warring parties used oil as leverage in their power struggle. Rival governments have seized control of oil facilities and closed them multiple times.
This is why Libya’s oil ministry last week said that production had dropped to 100,000 barrels/day in June from 1.2million last year. CNN’s Mohamed Oun, oil minister, said this week that some fields had been reopened and production had increased to 800,000. barrels per day.
Yet, the production is still below last year’s and highlights how the Libyan oil sector is still in chaos. No one knows who is in charge of the country’s crude supply.
Richard Norland from the US called the figures last week by the Oil Ministry “inaccurate” and stated that there are certain “parties who seek to gain an advantage by misrepresenting crude oil production figures”.
