Europe’s Unfolding Crises Could Impact U.S. Stocks. Here’s How.

U.S. investors are watching the Federal Reserve but the European Central Bank is likely to keep hiking rates to pull down prices, and those moves deserve more attention.

Graeme Sloan/Bloomberg

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U.S. investors are laser-focused on the Federal Reserve, and for good reason. The central bank is about to lift interest rates by another 0.75 of a percentage point, just as the quieter side of this tightening cycle, portfolio shrinkage, escalates. But that focus means other dangers aren’t getting the attention they deserve.

“While understanding the risk-free cost of capital is always central to investing, we fear equity investors have become overly myopic,” says Lisa Shalett, chief investment officer at

Morgan Stanley Wealth Management

Volatility has ticked up across currency and global bond markets, but the VIX, the U.S. stock market’s volatility gauge, has been benign, says Shalett. She warns that nearsightedness is setting the stage for a fraught 2023.

One risk that deserves more attention here are the crises unfolding in Europe. The continent is facing an energy shortage that is spurring record inflation and pushing the economy into recession. As the European Central Bank raises rates to pull down prices, higher borrowing costs dampen demand and could provoke another debt crisis. According to Zoltan Poszar, global head of short-term interest-rate strategy at Credit Suisse, roughly $1.9 trillion of German manufacturing output relies on the equivalent of just $27 billion of Russian energy input. Germany, Europe’s biggest economy, has been…


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