On April 6th the Federal Reserve (Fed) laid out its plan to reduce its balance sheet incrementally in the near future.
In light of the plan, ‘near-term risks are rising’ as the Fed attempts to combat inflation. A fall in the stock market, it seems, will have a greater impact on the rise of Bitcoin, oil, and copper, according to one analyst.
Senior Commodity Strategist at Bloomberg Intelligence, Mike McGlone sees macro-economic commodities as the biggest losers stating that Bitcoin, oil, and copper are set to take a beating if the stock market declines.
“The biggest headwind to Bitcoin and macroeconomic-sensitive commodities such as crudeoil and copper stems from possible stock-market declines. Near-term risks are rising as the Fed steps up its inflation fight, which could include efforts to cool the wealth effect.”
Fed needs to force stocks to fall
The roadmap for reduction of the balance sheet which was filled out with assets during the Covid pandemic comes in light of complications the Fed is expecting in battling inflation.
Market participants heads might be spinning from the change in outlook Fed’s interest-rate policy is having. A year ago no rate increases were expected for 2022, now they see the federal funds rate reaching about 2.5% by the end of this year and peaking at above 3% in 2023.
There are numerous uncertainties surrounding the Fed’s decisions, especially around how it will affect financial conditions and how those in turn will impact economic activity.
Market uncertainty is high
If financial conditions do not tighten on their own, which is not likely to happen, the Fed will most likely have to shock the markets to achieve this response. Investors should keep an eye on an increase in federal funds rates higher than anticipated.
To get inflation under control bond yields need to go higher and subsequently stocks need to go lower. If this occurs, the commodities market might suffer large losses falling in tandem with the stock market.
Investors should track messages coming from the Fed as well as Commodity and Macro strategists who track broader market movements.
This may not change the investment paradigms for market participants owning high-quality stocks, but keeping an eye on these indicators might be necessary to understand future developments in the markets.
Disclaimer: The content on this site should not be considered investment advice. Investing is speculative. When investing, your capital is at risk.