WHAT IS AHEAD FOR US

What are the markets all over the world expected to do over the coming weeks or months? No doubt, this is the million dollar question, but there are strong indications for things to come, at least for the macroeconomic environment, in which stock, commodities and any other market will have to operate. For one thing, interest rates will continue to fall for the rest of the year and central banks on both shores of the Atlantic will not leave the money markets to dry up. These prospects will certainly create more inflationary pressures in the US and the Eurozone, giving everybody a feeling of growth, at least on nominal terms. That is why commodities, oil in particular, continue to prosper and fuel prices have again taken the upward path to new historic records over the past weeks, surpassing the hundred dollar benchmark. In this respect, one should give a good reading to oil price oscillations during February and see that in a matter of less than 20 days this month, oil gained more than 10 percent. Oil prices started February with losses, despite the fact that this is a cold winter. It was the same in January. On the 8th day of this month, however, oil prices took off to the sky and continue to do so. The reason is that a recession does not appear as severe as it did at the beginning of the Millennium. Coming to the Atlantic economic environment, Commissioner Joaquin Almunia acknowledged last week that the European Union is now affected by the US sub- prime crises and growth in the Eurozone will be reduced to 1.8 percent. Not a bad prospect for a recession period. Predictions for less growth, however, open the way for interest rates reductions by the ECB in the near future. Interest rates in the Eurozone though do not need to be reduced as much as in the United States. This assertion was supported by past statements of the governor of the European Central Bank, Jean-Claude Trichet, who said that inflation is now threatening the Eurozone more than it did some months ago. This view was shared by Commissioner Almunia, who last week predicted more inflationary pressures during this year. On the other side of the Ocean, the ongoing turmoil in the American financial markets will create more of a need for the central bank’s cash injection in money markets, with a direct effect of upward pressures on prices. The same is true for interest rate cuts, so the cost of central bank money cannot go on diminishing the effect all year. Inflationary dangers pose restrictions to this, because more reductions will create grave inflationary problems and distort the parities between the major currencies. So the Fed and the ECB have limited weaponry to face further writeoffs of bad credit in the financial markets. On the real economy side, things are not so bad. The Eurozone will grow by 1.8 percent in 2008 and the US may not show negative GDP in growth. In total, the key to the current conjuncture lies with the credit markets. If the American sub-prime tsunami hits more sectors than real estate, then everybody will have severe problems.