August 13, 2022

Hardwood Paroxysm

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Bets on rate hikes in the US and EU, positive European stock exchanges are reduced

European European stock markets rose at the beginning of the session (+0.60% in Dax, +0.47% in Cac40, +0.22% in Ftse100 and +0.63% at 22,259 points in Ftse Mib). However, Wall Street futures moved slightly (-0.01% Dow Jones and +0.02% S&P500) as Russia slipped into technical debt default. With the deadline yesterday at midnight, in fact, the month of grace related to the interest of 100 million on bonds, one in dollars and the other in euros, maturing in 2026 and 2036, which investors have expected in the past 27, is over. This is the first foreign default since 1918.

Recession looms

While in the US, the market is not yet priced into a recession but it is looming. That’s because at the moment investors believe, as Fed Chairman Jerome Powell himself has noted, that a recession will be “weak.” the reason? “The balance sheet for companies and households is more solid than in previous recessions. The fact that real estate prices are at their highest in the US represents a store of value for families. On the other hand, companies are liquid, having been able to put hay on the farm during the shutdown period. The outlook finally points to an upcoming peak of inflation which should dampen the shock of higher prices,” explained Fabrizio Parini of Integrae Sim.

Bets on rate hikes in the US and EU are lowered

However, many Fed officials were in favor of a rate hike of another 75 basis points at the Federal Open Market Committee next month, expressing confidence in the central bank’s ability to avoid an economic downturn. Reuters reported that markets were setting a three-quarter point rise in July, but cut their year-end interest rate bets to 3.4% from 3.5%-4% previously. Similarly, investors lowered their expectations for a monetary tightening by the European Central Bank to +150 basis points by the end of the year from 175 at the start of last week and +230 cents by November 2023 from +275.

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Government bond yields rise

In this context, the 10-year BTP yield increased to 3.577% (the 10-year Treasury yield also increased to 3.162%) with the BTP/Bund spread at 198.90 basis points. Italian BTP collection stopped at €9.44 billion. Certainly less than the previous 2020 version which reached over 22 billion. For an inflation-related product, it was a mediocre package. France is active in the primary market and offers the following Btf: 2.6-3 billion due on 9/28/2022; 0.6 – billion, due date 11/16/2022; 400-800 million due 17/5/2023; 500-900 million due on 06/14/2023 and Germany offers 3 Billion Bubill maturing on 11/23/2022 and 3 Billion Bubill maturing on 5/17/2023. (All rights reserved)