EUROPEAN MARKETS: HIGHER RATES IMPACT

On 15 December, the U.S. Federal Reserve indicated it probably will raise interest rates at least three times next year (see related story in this issue).
The next day, the Bank of England raised its key interest from 0.1 percent to 0.25 and it was believed that Eurozone stock markets notched new record highs because the gamblers “priced in” future interest rate increases.
There’s the general belief that equities will be rising because economies will steadily grow and strong economic growth will deter negative implications of higher interest rates.
However, the fear also persists that inflation is drawing central bankers’ focus away from supporting the recovery and jobs market and toward cooling inflation, which risks an economic slowdown.
TREND FORECAST: Surveys of purchasing managers indicate that the Omicron virus already is dragging down Britain’s economy, one reason why the Bank of England’s interest rate hike (which, as we had forecast, should have come sooner) caught The Street by surprise.
And, despite inflation rising at 5.1 percent in the U.K., the highest rate in a decade, the B.O.E. 0.25 interest rate hike is minimal. Thus, when accounting for inflation, interest rates are actually negative. Therefore, should interest rates rise above 1.5 percent, the U.K. economy (which is facing new COVID War restrictions) and the equity markets, will rapidly decline.