A world where the global debt to GDP ratio is 350%, one would suspect central banks will not be willing to choke growth too much.

Global stocks remain something of a roller coaster ride at present. On Monday the S&P 500 fell 4% at one point only to finish the day close to where it started. The Vix index or fear gauge reached levels that have signalled capitulation amongst investors as demands for put options (insurance for falling markets) reached levels not even seen in early 2020. A swift change of momentum is often short-lived and the global sell-off resumed on Tuesday as the S&P 500 jockeys around the 10% correction level. Speculators are really sharpening their pencil on Cathie Woods ARKK fund as short interest is reaching record levels, according to a Bloomberg article. There are further indications that sentiment is falling deeper into panic territory as retail investors lost their nerve on Monday net selling almost a billion and a half dollars of equities.

It is difficult to know what the main driver is of the correction. The fact that the Fed is starting to shrink their balance sheet and raise rates, or the geopolitical tensions between Europe the US and Russia. The former is probably more so than the latter. One of the main problems with the Russian issue is no one leader in the game is vastly popular in his home country and war may present a pleasant alternative from domestic issues. Our own prime minister would welcome a distraction from party gate, Putin’s approval rating has been falling at home and Biden is falling even further in the polls, with midterm elections looming.

The real concern is what these tensions do to oil supplies into Europe, so far one could argue the oil price has not reacted that adversely remaining in the mid 80 dollars a barrel. The main issue the market is reacting to is the high valuation on non-profit making stocks at a point when the Fed is starting to shrink its balance sheet. If we look back at the last time the Fed started to raise rates and shrink down the balance sheet was in late 2017. The following year was not a great year for stocks as the S&P 500 fell 20% in late Jan and early Feb, then marking time to recover to finish the year just below where it started it.

Later on Wednesday Jerome Powell will speak to the press at the conclusion of the First Fed meeting of the year. He is most likely to reiterate the Fed’s commitment to tightening policy, whilst at the same time reiterating his belief that the inflation rates will fall, and point to some of the indicators for that we have. He will also remain upbeat on the recovery in the global economy that will support their policy stance. In a world where the global debt to GDP ratio is 350%, one would suspect central banks will not be willing to choke growth too much.