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The Fed plan to reduce its balance sheet and raise interest rates is already impacting European stocks, with several indexes set to decline.
European stocks may likely pullback following a new wave of developments in the US, including hawkish sentiments by the Fed. On Tuesday night, Federal Reserve Governor Lael Brainard suggested at a webinar in Minneapolis that the central bank might shorten its balance sheet. According to Brainard, this reduction has to occur quickly, alongside continual increments in interest rates, to combat rising inflation. Following her comments, major US averages traded lower, and the 10-year Treasury yield climbed to new highs for the year, at 2.562%.
Brainard’s call for a swift and aggressive policy could indicate the severity of the situation. This is because the high-ranking Fed official usually favors loose policy and low rates. According to the Governor, “currently, inflation is much too high and is subject to upside risks, the [Federal Open Market] Committee is prepared to take stronger action if indicators of inflation and inflation expectations indicate that such action is warranted.”
Outlook for European Stocks, US Stock Futures
Furthermore, European markets may also open lower on Wednesday following Brainard’s hawkish stance. For instance, Britain’s FTSE is set to trade approximately 30 points lower at 7,584. In addition, Germany’s DAX is almost sure to decline approximately 59 points to 14,365. Furthermore, the French CAC 40 will also fall back 28 points to 6,618, according to projections.
Meanwhile, US stock futures remained flat in early pre-market trading. This could be because investors are awaiting further details from the Fed’s meeting on Tuesday. These details may offer more insight into the central bank’s proposed balance sheet reduction.
San Francisco Fed President Mary Daly also supports the decision to contain inflation by increasing interest rates. Speaking to the Native American Finance Officers Association, Daly opined that this particular kind of inflation is “as harmful as not having a job.” She believes that this is so because inflation is now at a 40-year high. However, Daly assured of the Fed’s preparedness.
Imminent Sanctions Against Russia
Apart from the Fed, another factor currently threatening European stocks is the possibility of fresh sanctions against Russia. This development comes amid reports that there were civilian killings in Ukrainian towns now recaptured from Russian forces. As a result, global investors await the details of almost certain international sanctions against the Eastern European heavyweight. Meanwhile, the European Commission has already proposed a few suggestions for the next batch of punitive measures. On Tuesday, the governing body of the European Union proposed a ban on Russian coal as part of the next sanctions. As European Commission President Ursula von der Leyen expressed in a statement:
“We will impose an import ban on coal from Russia, worth 4 billion euros ($4.39 billion) per year. This will cut another important revenue source for Russia.”
Furthermore, the EU is exploring placing sanctions that could affect Russia’s oil and natural gas. However, this might be difficult because some member states depend considerably on Russian energy supplies. The European statistics office states that the EU imported 36.5% of its oil and 41.1% of its natural gas from Russia in 2020.