Equity markets finally stalled, and once once more the storm came from the United States. Admittedly, the Federal Reserve proved to be less aggressive than expected, following the two-day meeting of its monetary policy committee, ruling out the scenario of an acceleration of its monetary tightening, despite very high inflation. In the end, the American central bank contented itself, as expected, with raising its reference rates by 50 basis points, and not by 75 basis points as some feared.
“Central banks are very firm in their rhetoric but ultimately let the markets act for them,” says a bond manager. “They have lost a lot of credibility and that is why we have been witnessing a bond crash since the start of the year”he adds.
European squares in the red
This is the point of tension in the markets. The latter now doubt the ability of the Fed to curb inflation without disrupting growth. The specter of recession in 2023 arises even in the United States, as evidenced by the flattening of the yield curve. A scenario that was still unthinkable just a month ago.
So, the growth stocks (because of the rates) and the cyclic values (economic slowdown) are plunging together, with the exception of the oil and raw materials. After a roller coaster game, the american indices however, resisted over the week, with the black hole on Thursday, a session weighed down by the technology values.
More surprising is the stalling of the European stock markets, at the end of a season of publication of rather good quarterly results. So the CAC 40 yielded more than 4% over the last five sessions, to push the threshold of 6,300 points. same for me the Euro Stoxx 50 and other European indices.
As nothing is simple on the markets, it is rather the good employment figures in the United States which seem to have frightened investors this Friday. Bad luck, growth is still strong across the Atlantic, which opens the door to a succession of rate hikes in the United States of 50 basis points in June, July and perhaps even September (a priori excluded). Between fear of inflation or fear of a recession, the markets no longer really know where to turn to sell. All of this leads to a lot of volatility, to the great benefit of market operators.
Still no alternative
However, according to an investment manager at a management company, “At 6,300 points, equities are starting to become attractive once more.” US equities have fallen sharply since January, European equities slightly less, but given the earnings release and even some rather bullish revisions to the 2022 earnings outlook, stock prices are back to 2017 levels of around 18 times the profits on the S&P 500 and 13 times on the CAC 40.
Investors might then tactically return to equities, especially as the credit alternative is still frightening. The fall was indeed violent – more than 10% on long rates in three months – and many are still anticipating a new outbreak of fever on bond rates.
Enough to discourage the reckless who would be tempted by yields that have become much more attractive on quality senior debt. But there are still not many buyers, except insurers. Credit funds were even outflowing at the end of April. There is still plenty of cash to invest and equities still appear as a safe haven. Subject of course to a sharp deterioration in the situation in Ukraine.