The US is ready to go to war with China over Taiwan. ECB begins to normalize monetary policy

At the close of the stock market yesterday, the Dow Jones index (US30) increased by 1.98%, and the S&P 500 index (US500) added 1.86%. The technology index NASDAQ (US100) gained 0.30% on Monday.

US President Joe Biden said he was ready to enter into a military conflict with China "in case of an invasion" of Taiwan. In turn, the Chinese Foreign Ministry responded: "Taiwan is an inalienable part of China's territory. The Taiwan issue is a purely internal affair for China. China has no room for compromise or concession on issues touching on its core interests of sovereignty and territorial integrity. No one should underestimate the firm resolve, staunch will, and strong ability of the Chinese people in defending national sovereignty and territorial integrity".

Fed spokesman Bostick said yesterday that the US economy has not yet felt the full impact of the war in Ukraine. The upward price pressure on industrial inputs is still to come, and the Fed may well need to raise rates very sharply.

The BlackRock Investment Institute cut its ratings of developed market equities to "neutral" from "overweight," citing the Fed's potentially overzealous efforts to curb inflation and signs of an economic slowdown in China.

Major European indices traded higher yesterday. Germany's DAX (DE30) gained 1.38%, France's CAC 40 (FR40) added 1.17%, Spain's IBEX 35 (ES35) increased by 1.67%, and Britain's FTSE 100 (UK100) jumped by 1.67%. Head of ECB Christine Lagarde indicated yesterday that the ECB will start to normalize its monetary policy. The bond-buying program will be completed at the beginning of the third quarter. The interest rate will probably be raised closer to the end of the third quarter of 2022. If the ECB sees inflation stabilizing at 2% over the medium term, a gradual further normalization of interest rates to neutral rates would be appropriate. The speed of the policy adjustment and its ultimate point will depend on how the medium-term inflation outlook develops.

Germany's Ifo Business Climate Index rose for the second month in a row, but its current level suggests weakness. German businesses are suffering from the effects of the war in Ukraine, as well as disrupted supply chains from China. Analysts believe that household incomes will decline in the near term, and companies will find it increasingly difficult to cope with the costs associated with higher energy and commodity prices, putting pressure on corporate profits.

The Turkish lira is under pressure again due to rising inflation. Consumer inflation was 61% in the first quarter of the year, with prices rising in all subgroups.

Oil prices declined yesterday and continued to decline at the opening of trading today as fears of a possible US recession and rising COVID-19 cases in China outweighed expectations of limited global supply and increased fuel demand due to the US summer auto season.

Asian markets traded without a single dynamic yesterday. Japan's Nikkei 225 (JP225) gained 0.98% for the week, Hong Kong's Hang Seng (HK50) lost 1.19%, while Australian S&P/ASX 200 (AU200) added 0.047% on the day.

In New Zealand, retail sales (excluding price effects) fell by 0.5%. Australia's manufacturing PMI index declined to 55.3 in May from 55.9 in April. The service sector also saw a decline from 56.1 to 53. Rising prices, as well as supply chain problems, are negatively affecting the country's manufacturing activity.

Main market quotes:

S&P 500 (F) (US500) 3,973.75 +72.39 (+1.86%)

Dow Jones (US30) 31,880.24 +618.34 (+1.98%)

DAX (DE40) 14,175.40 +193.49 (+1.38%)

FTSE 100 (UK100) 7,513.44 +123.46 (+1.67%)

USD Index 102.07 -1.08 (-1.05%)

Important events for today:
  • – New Zealand Retail Sales (m/m) at 01:45 (GMT+3);
  • – Australia Manufacturing PMI (m/m) at 02:00 (GMT+3);
  • – Australia Services PMI (m/m) at 02:00 (GMT+3);
  • – US FOMC Member George Speaks at 02:00 (GMT+3);
  • – Japan Manufacturing PMI (m/m) at 03:30 (GMT+3);
  • – Japan Services PMI (m/m) at 03:30 (GMT+3);
  • – Eurozone French Manufacturing PMI (m/m) at 10:15 (GMT+3);
  • – Eurozone Germany Manufacturing PMI (m/m) at 10:30 (GMT+3);
  • – Eurozone Germany Services PMI (m/m) at 10:30 (GMT+3);
  • – Eurozone Manufacturing PMI (m/m) at 11:00 (GMT+3);
  • – Eurozone Services PMI (m/m) at 11:00 (GMT+3);
  • – UK Manufacturing PMI (m/m) at 11:30 (GMT+3);
  • – UK Services PMI (m/m) at 11:30 (GMT+3);
  • – US Manufacturing PMI (m/m) at 16:45 (GMT+3);
  • – US Services PMI (m/m) at 16:45 (GMT+3);
  • – US New Home Sales (m/m) at 17:00 (GMT+3);
  • – US Fed Chair Powell Speaks at 19:20 (GMT+3);
  • – Eurozone ECB President Lagarde Speaks at 21:00 (GMT+3).

by Justforex, 2022.05.24

We advise you to get acquainted with the daily forecasts for the major currency pairs.

This article reflects a personal opinion and should not be interpreted as an investment advice, and/or offer, and/or a persistent request for carrying out financial transactions, and/or a guarantee, and/or a forecast of future events.

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