Fear, fear and more fear. 2022 continues its bloody course on the stock markets with days of hysteria where fears are felt more and setbacks are amplified. It happened on July 5 with the panic of the recession multiplying and the sinking of oil, and it happened again this Thursday, with the US Federal Reserve, the central bank that the whole planet is watching, preparing for a drastic rate hike – and possibly historic – in a few days something that increases the risks of recession and translates into more pain in the markets. The European selective closed the session with declines of more than 1.5% – they were very close to exceeding 2% – with Wall Street trading with similar declines.
The continental trading session ends with the EuroStoxx 50 down 1.66% to 3,396.61 points. For its part, the Ibex 35 lost 1.77% to 7,804.30 points. The national team lost 7,900 in a single day and risked 7,800. In total, the most suffered index in Europe today is the Ftse Mib: the Milan stock exchange lost 3.44% to 20,554 .33 points per the umpteenth political crisis that the country is going through. Over the year, the European benchmark lost 20.98% (entering the bear market again) and the Spanish benchmark lost 10.44%.
“Significant falls in European stock markets which lead the indices of the Old Continent to approach the lows they marked on Tuesday of last week, which were at the origin of a rebound which at no time succeeded to overcome resistance, such as the 3,600 of the EuroStoxx 50 or the 8,400 Ibex points, necessary to ward off downside risks”, summarizes Joan Cabrero, adviser to Ecotrader.
“The highlight of today’s session was seeing how the Ibex 35 managed to resist on the support provided by the lower part of the gap which opened on the upside in early March from the 7,780 stitches. Closing this gap would be anything but bullish and pose a likely to fall to March lows in the region of 7,300 stitchesadds Cabrero. The risk of coming back in March, with the blow of the invasion of Ukraine when the ‘omicron wound’ had not yet been closed, is there.
In the markets the hangover of the U.S. June CPI ‘flamboyant’ data released Wednesday (9.1% yoy). This voluminous reading, which burned already high forecasts (today the PPI or producer price in the United States confirmed inflationary pressures), fueled the rumor that the Fed will raise rates by 100 basis points at its July meeting instead of 75, as expected and as in June, this is the largest one-time increase since 1994. If you decide to increase them by 100 basis points, like the Bank of Canada did yesterdaythe precedent will be in the early 1980s, when Paul Volcker was president of the central bank.
Although it is for the moment only a “bet”, the operators give more and more probabilities to this movement and analytics companies like Nomura or Citigroup have “jumped on the bandwagon”. “Since the Fed has made it ‘very clear’ that fighting inflation is the number one goal and that it is willing to risk a recession to achieve that goal, the more persistent the inflation, the greater the risk of recession is great,” writes strategist Dennis. DeBusschere, founder of 22V, in a note.
“It should be remembered that investors’ biggest fear right now is that central banks’ fight against inflation will eventually cause a hard landing in the global economy“, added by the analysis department of Link Securities.
“We are seeing a change in the behavior that the Federal Reserve has accustomed us to over the past few cycles,” said Tim Ng, fixed income manager at Capital Group. “And the reason is obvious: inflation is too high. According to Ng, investors must be ready to an increase in volatility, as the Federal Reserve and other central banks attempt to reduce inflation without plunging the global economy into recession. “Maybe it’s not possible to have both.”
Another of the day’s negative catalysts came from the big wall street banks, which kicked off the earnings season. The operators returned to take a bath in reality when JPMorgan Chase announced that it is temporarily suspending share buybacks as earnings estimates are not met and when Morgan Stanley experienced a decline in investment banking revenue. This blow was noticed immediately in the prices.
In key Europe, the bad news comes from Italy. The country faces its umpteenth political crisis adding uncertainty to the picture. The delicate government of national unity led by Mario Draghi suffered a serious setback when one of its members, the 5 Star Movement (M5S) He distanced himself from a key vote in the Senate to approve a crisis relief plan proposed by the Prime Minister and former ECB. The parliamentarians of the anti-system formation, recently split due to internal dissension, chose not to go to the polls. Although the package has moved forward, Draghi’s previous threat to step down if he doesn’t have full support within his executive complicates the horizon. Everyone fears a fall election.
The translation on the markets was not long in coming. The Milan Stock Exchange collapsed along with the banks (Intesa San Paolo, BPM bank there UniCredit) falling above 5%. Similarly, the 10-year bond yield rose to widen the spread with the German to the maximum in a month. With him dyke German 1.185%, the Italian 10-year bond (BTP) climbed to 3.4%. The Risk premium Italywhich measures the spread between the German bond and the Italian ten-year bond, reached 225 basis points.
The latter is a blow for the ECB, which is preparing your ‘anti-fragmentation’ tool precisely so that the differentials of peripheral bonds like the Italian do not fly away with each fear. “It’s fair to say that a political crisis would come at the worst possible time for the ECB, because it has to attach some kind of conditionality to its instrument,” says ING’s Antoine Bouvet. “Italian politics is pulling the cover under the ECB,” says Davide Oneglia, director of European and global macro research at TS Lombard.
