Between inflation and rising interest rates, the great nervousness of the financial markets

Monday January 24 will have been particularly chaotic on the world stock markets, falling violently before rebounding brutally, a sign of great nervousness, between the imminent rise in interest rates in the United States, the outbreak of inflation, the slowdown global economic recovery and geopolitical tensions in Ukraine.

In Europe, the day ended with a very sharp correction: -4% on the CAC 40, bringing the decline since early January to 8%. Same thing in Germany (– 3.8% on the DAX) and in the United Kingdom (– 2.6% on the FTSE 100). At the opening, the American markets, which generally give the global trend, seemed to continue the fall. At midday, the Nasdaq lost almost 5%. Then, to everyone’s surprise, the movement stopped. The US index ended up a slight 0.6%. You have to go back to 2008 to find such a rise during the session. The S&P 500, another American index less focused on new technology companies, experienced the same zig-zag: – 4% during the day, + 0.3% at the close.

Welcome to a world where trees no longer grow to the sky. During the pandemic, after the panic of the first weeks, the financial markets experienced a period of exceptional euphoria. Since their lowest point in March 2020, their valuation has doubled (for the Nasdaq) or almost (+ 82% for the CAC 40). Markets got drunk on the liquidity injected by central banks, a move that was necessary to keep the economic system afloat during the lockdowns but inflated the financial bubble.

End of the free money era

You don’t need to be a great expert in financial crises to imagine that the upward movement could not last forever. The Banque de France warned on January 10: the stock market valuations of companies have exceeded the level before the 2008 crisis and are approaching those of 2000, before the bursting of the Internet bubble. The lights all went amber or even red.

The whole question is when the reversal will take place. Is the fall of the last three weeks a simple temporary correction or the beginning of a real downward movement?

The signs of a change of economic era are multiplying, questioning the current balance of the markets. The most obvious is the action of the Federal Reserve, the US central bank. After being reappointed for a second term, Jerome Powell, its president, has a free hand. He notes with concern that inflation is back in the United States, at 7% in December 2021 (over one year), its highest level since 1982. Now, wages are not keeping up and purchasing power is declining.

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