Weekly update on the Markets
After the intervention of the ECB and Christine Lagarde, markets were calmed down by the announcement of a plan to contain spreads in Europe. We saw a rise in bond prices and a fall in yields, especially on the European government side. This is expected to continue especially on the dollar portion of bond issues, as expectations of rate hikes in the coming quarters are already being incorporated into the dollar. There could therefore be even a slight rebound in prices if the market is surprised on the upside, i.e. if there is a slowdown in the CPI (Consumer Price Index) in the US.
The stock market is expected to be stronger in both Europe and the US, thanks to the weakness of the euro which favours the balance sheets of European multinationals. Now is the time when inflation is coming strongly into companies’ balance sheets, already in the second quarter of 2022 there should be a positive impact on companies’ revenues and turnover. Later on, we should also see a positive impact on earnings, which have a 6-12 month lag.
Thus, volatility is expected to decrease slightly, with some companies likely to surprise the markets positively compared to current expectations regarding the presentation of financial statements.
The situation is slightly calmer than a few weeks ago, the real problem is the continuing war in Ukraine, where there is still no clear view of what will happen. Undoubtedly the impact is heavy and could increase on gas supplies, so the energy sector in Europe could face a difficult winter.
Already now the market is discounting this situation, both in terms of natural gas prices and the prices of companies such as European chemical companies, which are already experiencing a major drop in production and turnover. There are fears that further cuts in supplies will force some companies, especially in Germany and Northern Europe, to slow down production, if not to stop it temporarily.
We are experiencing a situation where we are constantly watching the market; prices are very good especially considering the upward potential also caused by inflation and within budgets. Some tension is expected with regard to European bonds, as the upcoming data on European inflation indices could surprise on the downside.
The ECB could be forced to pre-empt more than one might expect at the moment, and perhaps the euro could also strengthen again against the dollar.
However, this is still an unstable situation and it is too early to make predictions now. We will see in the next two or three months what the inflation data will be and how aggressive the ECB will have to be, and thus what the impact will be on bonds and equities within Europe.