DNCA Finance – Are markets expecting an end to financial tightening too soon? – PATRIMOINE24 – All wealth management news
Eighteen months ago, the market did not believe that the Fed would raise interest rates in 2022. He did not imagine a large-scale war on European soil.
He was more concerned about the zero covid policy than the invasion of Taiwan.
This week, Fed Funds futures traded up 5% for the first time this economic period. Russian strategic forces have conducted the first series of nuclear exercises since the beginning of the most serious conflict in European history since 1945. The United States says it is ready to use its arsenal in response. A few thousand kilometers away from the Ukrainian theater of operations, Xi Jinping’s assertion of dominance over his own party raises fears of a new front. The US General Staff expects that China will soon use force to ensure the reunification of the island and the mainland, which the party’s first secretary intends to implement “by all possible means”.
Over the past few sessions, markets have shown surprising resilience against this accumulation of asymmetric geopolitical and economic risks. As interest rates rise, investors turn their sights back to corporate loans. Investment grade and high yield stocks posted their first positive inflows in 8 weeks.
Despite the disappointing results of tech stocks (Alphabet, Meta, Amazon in the cloud segment), they benefit from the first return of capital since March. While Chinese stocks have been hurt by the Communist Party’s reshuffle, emerging markets have been showing the first signs of renewed interest from global managers since April.
Following the extremely pessimistic stance of the markets, the adoption of a less hawkish tone by the central banks (FED, ECB, Bank of Canada) explains these portfolio rebalancings. Dollar appreciation stops (euro is above parity again), risk assets are hedged.
But the problem of inflation has not yet been resolved, especially in Europe. Price growth is particularly accelerating in France: it rose 7.1% over the year in October. This is 0.6% more than expected. Such a gap between expected and actual figures is rare in our country.
Despite falling gas prices in Italy, where consumer prices rose by around 12% (the shortest periods even showed a negative price due to lack of storage capacity!), inflation in Italy is not slowing down. At this rate, European inflation risks breaking through the symbolic 10% ceiling. A problem for the European Central Bank, which noted that the drying up of the bond pool caused by its asset purchase programs has prevented a tightening of financial conditions… Same reading across the Atlantic, where the revival of growth in the third quarter beat expectations. and the new residential real estate market remains strong.
On the business side, results declined very modestly in Europe, where operating performance remained strong in the third quarter. The indications that strategists expect a sharp decline in earnings in 2023 have not yet materialized.
We are entering a delicate market phase. The hope reviving investors is related to the feeling that the tightening of financial conditions is now enough. If it is not yet really felt in the macro and micro economic data, this is supposedly due to the natural lag effect between monetary actions and their consequences in the real sphere.
While it is the nature of markets to sometimes wait for these lag effects on the side of over-optimism, prudence, on the contrary, invites us to wait for the first concrete signs of an end to the downturn in the economy, employment and inflation. compression cycle. The risk is not zero that recent session recoveries like this summer are part of the number of bear market rallies that break phases of long bear markets. In this case, the risk of disappointment could hit even harder as risk premiums (the spread between equity yields and 10-year interest rates) are sharply compressed, falling below the historical average in Europe.
Text completed on October 28, 2022 Thomas Planell, CFA, Manager-analyst
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