Stock markets have taken a bearish turn this year, as pressures are increasing after the strongest bullish trend we saw over the last two years. One of the factors applying bearish pressure in stock markets is the fact that central banks are now turning hawkish, and they are doing so pretty fast. The Bank of England has hiked interest rates twice already in the last two meetings, and the FED is preparing to hike at this month’s meeting, as Chairman Powell’s comments, which are displayed below, indicated yesterday.

The ECB is also turning hawkish after yesterday’s CPI (consumer price index) report, as inflation is surging in Europe as well – for last month, the report showed an increase of 5.7%, on an annualized basis. Considering all the cash that has been injected into stock markets by central banks during these times, it is a puzzle as to whether they will keep the bullish trend going, especially now that all that cash is drying up.

Highlights of Fed Chair Powell’s Comments

• US economy is very strong. Labor market is extremely tight
• I do think it is still appropriate to raise interest rates by 25 basis points in March
• Fed will not finalize balance sheet plan at this meeting.
• If inflation/growth persists, we would be prepared to move more aggressively, with a 50 basis point rise at a future meeting or meetings
• Fed needs to be nimble in light of the war in Ukraine
• Inflation is different, as it’s coming from goods sector
• Main focus Fed has is conducting policy to return US to price stability while preserving the expansion
• Fed is humble about the fact that it cannot call a turn in inflation with confidence
• There would be no direct effects on the US economy from Russian sanctions
• Price of oil depends on where Ukraine war goes
• On the balance sheet, it would take something in the range of three years to get to where we want to get to
• After we set balance sheet reduction course, we may speed up or slow down, but something in the range of three years.
• I expect the Fed funds rate to go up in two weeks, and a series of hikes this year, but given the Ukrainian situation we will proceed carefully
• Neutral rate is somewhere between 2% and 2.5%
• We are talking about getting to a neutral rate of 2% to 2.5%, and it may need to go higher than that
• Monetary policy works through expectations, rate hikes have already happened in effect, and we have to ratify them
• The increases in housing will be much smaller and will largely b a function of supply and demand.
• As we raise interest rates, mortgages will go up, prices will go up more slowly and demand will decline

S&P500 Index Daily Chart

S&P is trying to turn bullish already 

The other bearish pressure in stock markets comes from the conflict in Ukraine, which is weighing more on European stocks than the US ones. So, the US stocks are behaving better than European stocks for now. The major US indices shrugged off sharply higher bond rates and sharply higher oil and commodity prices yesterday, and are closed with solid gains.

• Dow up 596 points or 1.79% as 33,891.36
• S&P up 80.26 points or 1.86% at 4,386.53
• Nasdaq up 219.57 points or 1.62% at 13,752.03
• Russell 2000 up 50.36 points or 2.51% at 2,058.87

S&P500 has reversed higher, and it is now facing the 200 SMA, which will be the real test, as shown in the chart above, while the German DAX30 index has resumed the decline again this week, after trying to reverse higher last week. As long as the tensions remain in Ukraine, the bearish pressure will prevail on European stock markets.

DAX30 Index Daily Chart

The bearish gap hasn’t been closed yet