Key US stock market indices such as DOW Jones, NASDAQ and S&P 500 closed Friday with another drop. On February 24, all three indices opened with a huge gap to the downside, but rallied strongly during the day. Notably, the 24th of February was the day on which the military conflict between Ukraine and Russia began. After that, stock indices struggled but rose for a few more days. Now it looks like a new round of declines is about to begin. The retracement in the US stock market started months ago when it became absolutely clear that the Fed was starting an entire monetary tightening programme, which implies a complete rollback of the QE programme and a key rate hike at least 5 times in 2022. In addition, the Fed plans to start shrinking its balance sheet, which has expanded to $9 trillion in recent years. Thus, as most experts assumed, the stock market has started to feel the pressure due to the impending powerful tightening of monetary policy.
However, at the end of February, a full-scale war between Ukraine and the Russian Federation broke out. In its first days, as already mentioned, stock indices even rose, which is explained by the withdrawal of investors from the Russian stock market. It is natural that some of the capital withdrawn from Russian equities has flowed into the US market. Bitcoin, for example, was in the same situation. However, with many selling off Russian equities, the market is starting to react by fleeing risky assets.
Notably, a war, especially in the centre of Europe, and over a huge area, is very dangerous for the economy, for business, for the countries involved in the war and, of course, for investors. Therefore, it is not uncommon in such situations to start fleeing capital from risky assets. Simply put, those who own stocks that could be hit hard by war or sanctions start selling them off and moving money into the most liquid instruments or fiat money. This is why we have seen the dollar rise strongly in recent weeks, as it is the greenback that remains the world's reserve currency. Therefore, we believe that as long as the conflict persists, the US dollar will rise and cryptocurrencies and stock markets will fall to varying degrees. So far, we haven't even got to the point where the Fed will raise rates for the first time in three years. What will happen when it does, if the NASDAQ index has already lost nearly 20%?
