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LGT Navigator: Investors take cover ahead of Fed minutes

April 6, 2022

Indications of aggressive tightening of US monetary policy dampen investor sentiment. The minutes of the last meeting of the Federal Reserve could provide further insights into the monetary policy course today. Brussels wants to stop the import of coal from Russia. The proposal is now pending with EU member states.

Federal Reserve

The prospects of a significantly tougher pace of the Federal Reserve (Fed) and further sanctions against Russia put an end to the tentative recovery on US stock markets. The S&P 500 lost -1.3% on Tuesday and the Dow Jones declined -0.8%. The Nasdaq Composite closed -2.3% lower. 

In Asia, markets follow the weak guidance from the US, with technology stocks feeling the pressure. In Tokyo, the Nikkei loses -1.6%. The Hang Seng Index in Hong Kong trades also -1.6% lighter, and the Shanghai Composite sheds -0.3%.

Fed signals rapid balance sheet reduction

Market participants focus today on the minutes of the last meeting of the Federal Reserve. Investors expect that the minutes will provide further clues to the Fed's monetary policy stance. At the March meeting, the Federal Open Market Committee (FOMC) raised interest rates for the first time since the outbreak of the corona crisis and held out the prospect of a steep rate hike path. Central bankers were responding to the highest rate of inflation in forty years. Following the meeting, Fed Chairman Jerome Powell stated that the FOMC could start reducing the balance sheet as early as May and referred to the minutes for further details. Accordingly, expectations are now high. 

On Tuesday, Lael Brainard, member of the Fed Board, fueled speculations about an aggressive tightening of monetary policy. The Fed is aiming for a rapid reduction in the central bank balance sheet, said the economist, who is waiting to be confirmed as Fed vice-chair. She again cited the next meeting in May as a possible start date, adding that the Fed is ready to take even tougher measures in the fight against high inflation. Brainard's speech caused movement in bond markets. Ten-year US government bond yields climbed as high as 2.562%, trading at their highest level since 2019, and eventually settled at 2.55%. This was slightly higher than two-year yields, which traded at around 2.5%.

Brussels plans embargo on Russian coal imports

The EU Commission proposed new sanctions against Russia on Tuesday. The package includes a ban on coal imports and further trade restrictions, including on Russian banks. Commission President Ursula von der Leyen explicitly justified the new measures with the acts of violence against the civilian population in the Ukrainian city of Butcha, which became known over the weekend. “These atrocities must not and will not remain without consequences”, she said. Whether and when the sanctions will be implemented is an open question, as the proposal now rests with the 27 EU member states. Stopping energy supplies from Russia is controversial within the EU, as countries such as Germany and Italy are particularly dependent on Russian gas. However, according to German Economy Minister Robert Habeck, cutting coal imports is easier: Germany could do without Russian coal by the summer, he explained.

European companies weather adverse environment

Sentiment among European companies clouded over in March, but the decline was moderate despite the war in Ukraine. That's according to the Purchasing Managers' Index for the eurozone, which fell 0.6 points from the previous month to 54.9, S&P Global said Tuesday, according to a second estimate. This was an upward revision of 0.4 points from the first survey. The service sector in particular contributed to the improvement, benefiting from further easing of the corona protection measures. In contrast, the situation in industry deteriorated. An index value of over 50 signals an expansion of activity. 

British economic sentiment recovers

Sentiment in the British economy brightened surprisingly in March. The Purchasing Managers' Index climbed to 60.9 points, 1 point higher than in the previous month. The barometer thus reached its highest level since June 2021. In an initial estimate, S&P Global had still calculated a slight decline to 59.7 points. In the UK, too, the encouraging development is attributable to the service sector. However, the short-term outlook has deteriorated due to the war in Ukraine and high inflation. 

  

Economic Indicators April 6

MEZ Country Indicator Last period
03:45 China Caixin PMI Services (March) 50.2
08:00 GE Industry orders (February, m/m) +1.8%
20:00 US Minutes FOMC meeting

 

Earnings Calender April 8

Country Company Period
CH Ems Chemie Q1 2022

 

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Publisher: LGT Bank (Switzerland) Ltd., Glärnischstrasse 36, CH-8027 Zurich
Editor: Alessandro Fezzi, E-Mail: lgt.navigator@lgt.com
Source: LGT Bank (Switzerland) Ltd.

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