The Fed Is Preparing to Pull the Trigger
In today’s Money Morning…a necessary slowdown…lifted bans and rising tensions…whatever happens, opportunity will abound for those who seek it…and more…
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It looks like March is when the Fed will finally decide to raise rates. Or, at the very least, Powell has confirmed that asset purchases will be coming to an end only three months into 2022.
This is a move that has clearly been somewhat priced in by markets in recent days. After all, with inflation on the rise, the Fed had to step in eventually. It was simply a matter of whether it’d be sooner or later.
Now, though, with the US economy running hot, sooner seems to be likely.
So the real question now is, what happens next?
Will this confirmation from the central bank help stabilise the correction?
Or could this be just the beginning of a much larger sell-off?
A necessary slowdown
Honestly, no one knows where stock markets may head from here. There is plenty of speculation, but no one really knows.
What I will say, though, is that if you’re a long-term investor, you shouldn’t be too upset with this correction. It is a necessary part of the cycle that helps open up opportunities for the next bull run.
However, it will be interesting to see how it impacts other central banks.
After all, if the Fed is raising rates to fight inflation, that will likely pressure other developed economies to follow suit — especially as inflation has gathered pace across Europe, Australia, and numerous other parts of the world.
I expect we’ll see the RBA bring forward their own interest rate agenda, ditching the previously stated hold off on raises until 2024, and instead bringing them in much earlier than expected.
Again, though, that isn’t inherently a bad thing. It just means investors won’t be able to profit off of easy money anymore.
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Instead, you’ll have to start hunting out bargains or in-demand sectors.
And one such sector that I’ve mentioned a few times in regard to this trend is oil.
Because if there is one industry to focus on right now, it is energy. And not just because of rising interest rates, but also because of some much bigger events…
Lifted bans and rising tensions
First and foremost, the more important story than the Fed this week (in my opinion) is the recent reversal by China. Beijing has finally decided to lift its import ban on Australian coal — clearing the way for 6.2 million tons of coking coal, and 5.5 million tonnes of thermal coal to be let into the country.
This is an important turn of events, not only because it showcases China’s continued reliance on our commodities but also because it will be seen as a huge political loss.
From that, it seems safe to infer that China must be extremely desperate to let this happen. It’s a decision that could help lift some of our local miners and energy exporters.
Beyond this, though, there is an even bigger storm brewing over in Europe.
Tensions between Russia and the EU are on the rise, particularly as it looks as if fighting at the Russia–Ukraine border could kick off at any moment. If that happens, it could jeopardise key gas pipelines from Russia to Western Europe.
If these pipelines begin to stall, or worse, cease production altogether — then Europe is in big trouble. It’s a situation that could leave them scrambling to secure new supplies from elsewhere.
So while it is probably unlikely that Australian producers will fill that gap, it would almost certainly impact gas prices, nonetheless. Compounding an already troubling shortage of the key fuel.
Again, though, when it comes to all these big macro stories, no one knows for certain what will happen.
It all depends on an innumerable number of variables. Each of which could send stocks higher or lower.
So keep an eye out for ongoing developments, because whatever happens, opportunity will abound for those who seek it.
Editor, Money Morning
PS: Ryan is also the Editor of Australian Small-Cap Investigator, a stock tipping newsletter that hunts down promising small-cap stocks. For information on how to subscribe and see what Ryan’s telling subscribers right now, click here.