Everyone will be watching the Federal Reserve meeting next week, when the central bank will again likely announce hike rates by up to three-quarters of a percentage point. I get it -- boosts in interest rates have already started to hit the economy, and especially the housing market. But another big worry is thousands of miles away, in Europe -- or more precisely, Ukraine.
The news there is mixed. We have what are reportedly some victories in Ukraine, which seems to be regaining some territory over the past week or so. The picture of what is happening there, however, is still opaque. But if the reports are true, investors have to start asking some tough question. If Russia is indeed retreating in the face of a flood of weapons from the West hitting the battlefield, is this a temporary setback or the turning of the tide? Would this increase the chances of a peace settlement -- or would it obstruct them? If President Vladimir Putin feels like the war is shifting out of his favor, will he completely shut off all energy and commodity exports to Ukraine's European benefactors? Will Russia consider using tactical nuclear weapons to achieve its aims if it can not do so with its manpower?
Obviously, the answers to these questions have the potential to continue to roil global markets. It is hard to see how Europe avoids a long, dark winter. E.U. energy ministers last week strongly suggested that each country in the union implement plans to cut energy use by 10% before cold descends upon the continent. The U.K., Germany and other countries have already started to put in place massive programs to subsidize energy costs for consumers and businesses. Of course, this will have to be financed via even more government debt. This will be a further tailwind to inflation pressures as well as a headwind to the pound and the euro in the currency markets.
Already, approximately half of the zinc and aluminum smelting capacity in Germany has been shuttered and steel producers are also cutting back on production and closing plants. This is the last thing the already challenged global supply chain needs at the moment. This may benefit American producers like Nucor (NUE) , thanks to their access to lower cost energy sources, but this is likely to continue to harm the American economy.
Europe is scouring the globe looking for energy supplies to make up for the lost ones from Russia. This is keeping fuel costs significantly higher than they would be in our economy that has experienced two straight quarters of GDP contraction as it is. This is especially true of natural gas as Europe is now taking three quarters of the country's LNG exports. Good for the likes of Cheniere Energy, Inc. (LNG) , but not so for the American consumer that has already lost approximately 10% of their buying power to inflation over the past year and a half.
So, while the next week will be dominated by stories around Federal Reserve policy, I continue to keep a close eye on Europe, as events there could have significant impacts on our markets at least through the end of the year, if not longer.
