Major US stock market indices such as DOW Jones, NASDAQ and S&P 500 all closed Tuesday with fairly strong gains, but these gains have no bearing on the current technical picture at all. The US stock market continues to retrace after a long uptrend and most experts continue to believe that 2022 will be a very challenging year. During yesterday there was not a single piece of really important news relating to geopolitics. Notably, investors and traders are reacting the most to geopolitics right now. We believe that yesterday's rise in the indices was due to today's Fed meeting, as there were no other reasons to do so. However, this upfront market reaction hardly reveals the Fed's mindset. In other words, it is unlikely to mean that the Fed will take a dovish stance on its own monetary policy today. As a reminder, any tightening of monetary policy is negative for the stock market because it means that yields on safe-haven assets, such as bank deposits, are rising. Consequently, demand for risky assets, which includes equities, is falling. Therefore, a rise in the stock market a day before the Fed meeting results are announced means in theory that investors do not believe in a tightening. In practice, however, they may be guided by the view that the rate hike will not be 0.5% but rather 0.25%, which in the current circumstances is still very good, as inflation continues to rise at a high rate and in the good sense the Fed should have started to raise the rate long ago.
A second option is also possible. Markets are preparing for any tightening of monetary policy. Yesterday's rise is a rally before another fall. In geopolitics, there is not much news. We have already said that the military conflict in Ukraine is increasingly reminiscent of the conflict in Donbass, which has been going on for eight years. Fighting for Ukraine's major cities continues. There has been no advance by Russian troops, so both armies have taken up their positions and moved into tactical combat. However, as we have also said, some reduction in fighting cannot mean that the conflict has been paused. Over the past few days there has been hope that in the coming weeks Moscow and Kiev will manage to reach an agreement and at least stop the firing. This has been stated several times by the Ukrainian authorities. However, at the same time, most political experts believe that this situation n in Ukraine could drag on for years to come. If we pay attention to how long the wars in Syria, Iraq, Vietnam, Afghanistan and Chechnya lasted, it is possible that the Ukrainian-Russian conflict could indeed drag on for several years. Thus, we believe that there will be reason for optimism when Moscow and Kiev officially announce at least some kind of agreement, not before.
