Inflation could be here to stay

By: Miguel A. Rodriguez

16:23, 01 December 2021

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FED’s Jerome Powell recognized what was evident to investors for a while now, leading to a new halt in the market sentiment.

After a day of correction, the market returned to the negative risk sentiment. It seems that two events were those that led investors to the situation of concern and fear.

 

On the one hand, the CEO of the pharmaceutical company Moderna stated that current vaccines would probably be less effective against infection with the Omicron variant. Although he said the company was already working on modifying the current vaccine, this would not be ready for use for at least two-three months. All this without taking into account the approval period of government institutions.

 

The stock markets fell from these statements, and the treasury bonds purchases began with a consequent fall in yields, as the dollar weakened due to correlation.

 

On the other hand, something unexpected came from Federal Reserve Chairman Jerome Powell before the Senate Economic Committee. For the first time - and surprisingly - Powell explicitly admitted that inflation can no longer be classified as transitory and that it would probably last longer than expected. Consequently, they should consider accelerating the bond purchase reduction rate in the next meeting on December 15th. 

 

The inflation not being transitory and Fed being behind the curve were rumours already speculated in the markets. 

 

In reality, the pressure from investors was high in this regard. Finally, the Fed president gave in to pressure, recognizing what was evident to most market participants.

 

The effect of this unexpected statement was to put significant pressure on the stock markets, especially on the Nasdaq, which is more sensitive to increases in financing costs. 

 

The possibility of a worse pandemic, the stop in global economic activity, and more mobility restrictions are the factors that led to a withdrawal of monetary stimuli from the Fed.

These worries have made the oil price fall as we also witnessed declines in commodities and indices.

 

The most affected index was the DowJones30 that lost almost 2%, trading below the 0.618 Fibonacci retracements and leaving the way free - from a technical analysis point of view - towards the support located around 33700.

Oil also suffered severe losses that exceeded $5 in the session, leaving a very bearish technical image by breaking the bullish channel operating since May 2020, potentially leading to significant losses until the next support touches the 61.90 levels.

Sources: Bloomberg, Reuters.

 

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