Red Sea tensions are a threat to easing inflation, and Fed doves’ optimism! | MarketTalk: What’s up today? | Swissquote

Show notes

The week started with mixed feelings. Investors broadly ignored the Federal Reserve (Fed) members’ latest warnings that the interest rate cuts won’t come as soon and as fast as priced in by the financial markets. Equity bulls look determined to keep the Xmas magic alive. Big banks like Goldman Sachs also add fuel on fire, citing that the dovish Fed is good for stocks. We all agree. Dovish Fed is good for stock valuations, yet, how long the Fed could remain dovish if the economy heats up? It depends…
Yesterday’s trading was marked by geopolitical tensions and news. The week started with the news that the world’s leading shipping companies decided to halt transit through the Suez Canal due to attacks by Iran-backed Houthis on commercial ships. The latter increases the risk premium of using the short-cut of Suez Canal and encourages ships to go around Africa instead. An extended period of disruption in global trade ways should not only sustain energy prices, but also put a renewed pressure on global supply chains and shipping prices. The latter is a threat to inflation.
As of today, upside risks to inflation persist and build up, and this will inevitably dawn on investors sooner rather than later. A stronger case is being built for a sizeable downside correction in both stock and bond markets into next year.
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