Fed monetary tightening hits Wall Street

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The US Federal Reserve’s decision to raise interest rates and begin to reduce its holdings of financial assets due to rising inflation is having a significant impact on Wall Street.

The Wall St. street sign is framed by American flags flying in front of the New York Stock Exchange, Friday, Jan. 14, 2022, in the Financial District. (AP Photo/Mary Altaffer)

What was described as an ‘April rout’ continued yesterday and the NASDAQ index fell 4.2%, bringing its total loss for the month to 13%. It was the worst month since October 2008 in the midst of the global financial crisis, and brought its fall for the year to 21%.

the the wall street journal reported that “the selloff erased trillions of dollars of market value from the tech heavy gauge, with investors going wild on stocks of everything from software and semiconductor companies to social media giants.”

the FinancialTimes (FT) reported that the NASDAQ plunge has erased more than $5 trillion from its market value since last November’s record high.

So-called FAANG stocks – comprising Meta (Facebook’s parent company), Apple, Amazon, Netflix and Alphabet (Google’s parent company) – together lost $1 trillion in market value. Individual falls are important. Amazon posted a 26% loss for the year and Apple 11%. Netflix fell 49% in April alone.

There were significant declines in other areas of the market. The S&P 500 index fell four weeks in a row with an 8.8% loss for April. Its loss for the year, which began with an index at an all-time high, is 13%.

The Dow Jones fell 4.9% in April and is down 9% this year. Both indexes recorded their worst month since the March 2020 plunge at the start of the COVID-19 pandemic.

The main reason for the market’s decline is the biggest surge in inflation in four decades, which is pushing central banks to tighten monetary policy. When inflation was very low, they could pump money into the markets in response to a downturn without fear that it would trigger a price hike.

These policies have resulted in a 250% increase in the MSCI World Growth Stock Market Index over the past decade. But inflation means that conditions have changed.

As Barry Norris, chief investment officer at Argonaut Capital, told the FT: “Every time there has been a sell-off in the markets, there has been a central bank outlay. Central banks are not going to come to the rescue this time.

The change in central banks intersects with the continuing problems of global supply chains. These were caused by the refusal of capitalist governments to take coordinated international action to eliminate the pandemic, fearing that the necessary public health measures would have a negative impact on stock markets and the financial system in general.

These decisions have now reverberated on the real economy with major effects. Apple alone forecast this week that it could take up to $8 billion in the current quarter due to supply chain issues.

“Supply constraints caused by COVID-related disruptions and industry-wide silicon shortages are impacting our ability to meet customer demand for our products,” the director said this week. financial company, Luca Maestri, to analysts.

The kind of strain Apple is experiencing extends across the entire global economy – there’s hardly any industry that hasn’t been hit – meaning losses will be in the hundreds of dollars. billions, even trillions of dollars.

An indication of the continuing and worsening economic effects of COVID was the surprise news earlier this week that US GDP contracted at an annualized rate of 1.4% in the first quarter, partly due to the effects of the COVID surge at the start of the year.

The Biden administration has dismissed the figure as a “statistical oddity,” but the growing view is that a significant change is afoot. There are fears that inflation, already at over 8%, will rise so rapidly that the Fed will have to raise rates to a level that will trigger a recession.

Recessionary tendencies are becoming increasingly apparent in Europe as inflation continues to rise. The rate for the eurozone was 7.5% for the year to April and up from 7.4% in March, driven by soaring energy prices, up 38% and food prices unprocessed which jumped 9.2%.

The price spike is occurring under conditions of weakening economic growth. GDP for the 19 eurozone countries grew by only 0.2% in the first quarter, compared to 0.3% for the last three months of 2021.

The French economy showed no growth for the first quarter and the Spanish economy contracted as did the Italian. The German economy grew by just 0.2% over the previous three months.

The chief economic adviser to Italian banking conglomerate UniCredit, Erik Nielsen, told the FT: “The world is really bad. Particularly in Europe, where we have now entered stagflation.

He said there was a “double whammy” looming in the euro zone where the European Central Bank was likely to start raising rates due to inflation amid economic downturns.

China is also experiencing significant financial turmoil due to the latest COVID outbreak, which the government is struggling to contain. The renminbi fell 4.2% against the dollar this month, a record drop, greater than the 2015 plunge that rocked global markets.

The falling currency limits the government’s ability to take economic stimulus measures. Selling of the renminbi accelerated after President Xi Jinping announced increased infrastructure spending to try to blunt the economic effects of shutdowns in Shanghai and other major cities.

The Fed’s monetary policy tightening has major international ramifications because it effectively sets monetary policy for the rest of the world.

One of the effects of rising interest rates and a soaring value of the dollar is to put increasing pressure on poorer countries that have dollar-denominated debt.

A recent New York Times Georgetown University economic historian Jamie Martin’s op-ed piece noted, “Conditions are now ripe for the Fed to precipitate another global crisis. Extremely high levels of emerging market debt are of particular concern. The International Monetary Fund estimates that around 60% of low-income countries are in or near debt distress.

Sri Lanka, he writes, may well be the first domino to fall. But the conditions there, which have sparked mass protests and demonstrations against the government, are just a stark expression of the struggles now unfolding in low-income and advanced economies, amid a further deepening of the historical crisis of the world capitalist economy. system.

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