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12 September, 2022 - The ECB slams on the accelerator

The ECB raised interest rates by 75bps to 0.75% and left a hawkish message at the press conference. After the FED rattled markets at the Jackson Hole symposium, it was the turn of the ECB to present its own message with respect to its next steps. The message was crystal clear: according to President Lagarde's own words, the Governing Council concluded that "determined action had to be taken" and "unanimously" decided on the 75bps move. She repeatedly said that even after today's hike, key ECB interest rates were "far away" from the level that will bring inflation back to the 2% target. In more plain English, this means that the ECB has decided to front-load the interest rate hikes so as to move them aggressively higher by the end of this year or early 2023. Expectations are now for another 75bps in the next meeting and 50bps in December, to bring the deposit rate to 2% . What is important for markets is the terminal rate of this cycle. It now stands at 2.00-2.25%, which means that by very early 2023, the ECB must be done raising interest rates (positive for equity markets).

Speaking of central banks, the Bank of England is meeting on Thursday. The consensus is for a 50bps increase to bring the rate to 2.25%. The Swiss National Bank is expected to meet next week, on the 22nd, to raise, at last, its interest rates in positive territory. The markets expects the Swiss central bak to copy the ECB and raise rates by 75bps. In other central bank news, the Australians raised by 50 bps to 2.35%.

Equity markets recovered after three negative weeks. US equities out-performed the rest of the world with a 3-4% rally for its major indices and China followed with 2% gains on average. Europe moved higher by less than 1%, as sentiment for the region remains deeply depressed. Having said that, the German DAX is now trading again at about 10 times its forward earnings expectations, which shows that a recesson has already been discounted in the stock prices, to a great extent. On a 12-18 month basis, stocks like Volkswagen, Deutsche Post, Siemens Energy, to name but a few, look like bargains.

China's inflation for August was announced better than expected, at 2.5%. This compares with the 2.7% in July, while expectations were for a rise to 2.8%. The continuing Covid19-related lockdowns which impact the economic activity is a natural dampener on prices, but China does not seem to have an inflation problem anyway. To avoid having similar problems as the western world, the Chinese monetary authorities have chosen to provide very targeted liquidity boosts when needed, instead of a "bazooka-type" stimulus program. This strategy has disappointed markets which have been accustomed to (almost unlimited in size) QE schemes in the West for almost a decade. But China does not want to find itself in the current state of Europe and the US, struggling to tame the inflation beast.

The US inflation report (CPI) is out this week and expected to move the markets. It is expected to show a further slowdown, to 8.1% on an annual basis, vs. the 8.5% figure of July. What is a bit worrying, as mentioned last time, is the fact that the Core CPI is creeping higher at a time when the headline number seems to have peaked (thanks primarily to commodity prices moving down). The Core CPI is unfortunately "stickier" as it includes wages and rents, and once these move higher it is very difficult to come down.

OPEC+ cut production but oil prices continued to move downwards. The WTI Crude dropped below 82$, for the first time since mid-January, but closed the week at 86$. As a reminder, WTI was at 76$ at the end of last year and before the Russian invasion, which means that current prices are "only" about 10% higher since. Trying to forecast where prices will go with so many moving parts and unknowns is, in our opinion, futile.

Bond yields moved higher (prices lower), as it was a week flooded with central banks' actions and oral communication that shook the bond market. The US 10-year yield reached a high of 3.35%, up from 3.20% the previous week, while the German equivalent jumped to 1.80%, only to settle below 1.70% .

The EUR zoomed higher after the ECB meeting, to a reach a high of 1.01 against the USD. It had traded below 0.99 just the previous day of the meeting. A big part of the USD rally (EUR fall) this year can be attributed to the big interest rate differential between the two currencies, as the bond market had already discounted a more aggressive FED than the ECB. But this rate differential is now expected to shrink again in the coming months, hence a fall below 1.000 for the EURUSD will only happen again, if there is a severe recession or crisis in Europe in the coming months.


Chart of the Week :

The technical picture of Oil worsens

A few weeks ago we hinted that Oil is entering a bear market and now it is sitting almost 30% lower than its peak in June. Since then it has been on a clear downtrend as is shown in the above chart. To make the situation even worse, from a technical point of view, a "death cross" occurred last week. The formation of the "death cross" is when the 50-day moving average (green line) cross below the 200-day moving average (purple line) and is usually a bad omen, on a short-term basis. This follows the failure of oil price, at the end of August, to break-out of the 200-day moving average. On fundamental grounds, there are reasons for oil prices to move higher again or lower depending on which driving force will win. The energy crisis and the dependence on Russia for parts of the world is a force that is pushing oil prices higher. But a recession and a slowdown of economic activity is pushing naturally oil prices down. The investors who have a dark view on the economic prospects of the world and believe in an upcoming deep recession should not really bet on higher oil prices.


• The content of this document has been produced from publicly available information as well as from internal research and rigorous efforts have been made to verify the accuracy and reasonableness of the hypotheses used. Although unlikely, omissions or errors might however happen.

• The data included in this document are based on past performances and do not constitute an indicator or a guarantee of future performances. Performances are not constant over time and can be positive or negative.

• This document is intended for informational purposes only and should not be construed as an offer or solicitation for the purchase or sale of any financial instrument and it should not be considered as investment advice. The market valuations, views, and calculations contained herein are estimates only and are subject to change without notice. Any investment decision needs to be discussed with your advisor and cannot be based only on this document.

• This document is strictly confidential and should not be distributed further without the explicit consent of Kendra Securities House SA.

• Sources: Chart of the Week : Factset


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