What’s going on in the markets: Q1 2022
Here’s how to get your head around what happened in Q1 2022 and why that’s affecting the markets.
It looks like 2022 will be a very different year for the markets. Instead of crashing lows and soaring highs, the markets for now are fairly stable. But that doesn’t mean there aren’t strong forces pulling prices either way. Here’s why.
Q1’s main trend
Many assets are in a phase of consolidation. Consolidation is when assets bob up and down between a limited price range. This is because the effect bears (people who sell because they think prices will go down) and bulls (people who buy because they think prices will go up) more or less cancel each other out.
Dealing with the world’s inflation problem
Inflation is on the rise. Inflation is when the purchasing power of a currency drops against rising prices. That means that €100 buys you less than it did one year ago, even if you didn’t touch it. When inflation creeps up, it’s bad news for money.
That’s why the United States Federal Reserve (aka The Fed) is taking action. The Fed manages the U.S. economy in the same way that the European Central Bank (ECB) does for the Eurozone. In order to combat rising inflation, the Fed is set to raise its interest rates, with some research suggesting that they could raise their rates seven times this year.
Because the United States’ economy is so big, decisions made by The Fed affect the markets. While this could help the global economy, it does mean there is less money to spare for stocks and digital assets which could drag prices down.
The Russia-Ukraine war is having a big effect on the markets and a long military conflict is probably the biggest risk to growth for Europe. Energy prices are rising after Russia started selling fewer fossil fuels to Europe and conflict generally makes investors nervous, which is bad news for the markets.
Some analysts are suggesting that conflict and government sanctions could see a rise in cryptocurrency prices but it’s worth remembering that people tend to sell assets when times get tough, cryptocurrency included.
Europe rejects banning crypto mining
It’s not all bad news. The European parliament rejected a hardline provision in a proposal that could have banned proof-of-work cryptocurrency mining. The defeated provision suggested that proof-of-work is bad for the environment.
The outcome of the Markets in Crypto Assets framework will include more regulatory clarity about digital assets in the European Union which could help to find new use cases for cryptocurrency as well as make it easier for people to buy and use them. While such a result would normally make the markets happy, the stormy conditions around the world had a dampening effect.
This first quarter has been a kind of waiting game as the world watches the Russia-Ukraine war, as well as how the Fed will tackle the world’s inflation problems. A lot of market activity rides on whether the conflict comes to an end and whether the Fed decides to fight inflation head on or tolerate prices for stability. Until then we could see prices stay where they are.