Not Emmanuel Macron, but Jerome Powell was the most influential figure in European financial markets on Monday. Central banks determine the direction of the march.
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The Euro Stoxx50
, the euro-zone’s basket of star stocks, closed 2.2 percent lower on Monday, the exact same loss as last Friday. The Brussels stock exchange also had two bad days in a row with a loss of 3.3 percent for the Bel20
since Friday morning. “You can say that it took a long time before interest rate fears hit the stock markets,” responds Philippe Gijsels, chief strategist at BNP Paribas Fortis.
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Also at the rate of the euro
the barometer of confidence in the eurozone, did not show that investors are relieved about the re-election by French President Emmanuel Macron. The European single currency tumbled below $1.07 on Monday, for the first time since the start of the pandemic in March 2020.
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To be clear, it is not so much the euro that is weak as the US dollar that is strong again. The reason? The US central bank (Fed), which, at the suggestion of its chairman Jerome Powell, plans to implement the fastest series of rate hikes in 40 years.
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“We expect the Federal Reserve to raise interest rates by 50 basis points at its May, June, July and September meetings,” said Aneta Markowska, chief economist at the Jefferies stock exchange. It has been since 2000 and the dotcom craze that the Fed raised interest rates by a half instead of a quarter of a percentage point. Those Fed rate hikes are a global problem because the fee on dollars, the world’s most liquid investment, is the de facto global price of money.
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The stock market is interest rate sensitive
‘The stock market is an interest-sensitive environment’, says Gijsels. ‘Low interest rates have pushed the markets up in recent years. Now that interest rates are rising again, it is not illogical that pressure is developing in the opposite direction. Not a single sector is completely spared.’ Investors are also bracing for a sharp slowdown in the Chinese economy, the world’s second largest, due to the lockdowns with a continued zero-covid policy.
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We are going through a transition period. The markets have to adapt to a new reality.
Philippe Gijsels
Chief Strategist BNP Paribas Fortis
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Meanwhile, the 10-year US Treasury yield is not far from 3 percent. ‘The markets have to digest that fact anyway’, says Gijsels. “I do not immediately fear a major crash, but I do fear that it will be more drawn out than with the corona crash of March 2020.” Then banks massively pumped liquidity into the system, which led to a lightning recovery of the stock markets. ‘That is no longer an issue, especially in view of the high inflation. This time, recovery will be a slightly longer-term story,” says the strategist.
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Cause for panic?
Is there cause for panic among investors? It is best to keep a few things in mind, says Gijsels. ‘We are going through a transition period. The markets have to adapt to a new reality. The era of monetary stimulus is coming to an end. It is quite logical that this transition entails volatility.’
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In addition, Gijsels expects that the real interest rate (interest less inflation, ed.) will remain negative for some time to come. In any case, it is therefore advisable to have real assets such as shares and real estate in your portfolio. He therefore remains positive on the equity markets in the slightly longer term. ‘Doing your homework well is now doubly important for investors. It is best to remember that sectors or stocks that bottom out first are usually the first to rise again.’
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US stocks initially traded lower on Monday, but the late Twitter deal with Elon Musk helped Wall Street get over the interest rate fears. The Dow Jones closed 0.7 percent higher, the Nasdaq even gained 1.3 percent.
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