US stock market indices rose 2-3% on Monday and Europe followed suit on Tuesday. By four o’clock, the German Dax had gained 2.7%, while the rise in the French Cac and the British FTSE was 3.4 and 2.1% respectively. Long bonds and precious metals also received a solid boost.
The development reflects the hope that central bank monetary policy will be less “hawkish” than previously thought. The fact that the Reserve Bank of Australia (RBA) has decided to raise interest rates by a quarter of a percentage point has reinforced these expectations. As is well known, the Bank of England decided last week to launch a “temporary” bond purchase program to lower UK long-term interest rates.
In addition, the focus on Credit Suisse and Deutsche Bank issues has helped make investors think a more cautious stance on the part of the European Central Bank (ECB). Investors reason that, among other things, the ECB and the Fed will always choose to prevent a new financial crisis rather than continue their fight against inflation undaunted. This is already reflected in the futures contract market. There, a US policy rate of 4.25 percent is clearly considered the most likely at the end of next July, while 4.50 percent was the main scenario just a week ago.
A lower rate of tightening will not only lead to higher consumer price growth than it otherwise would have been. It will also contribute to increased economic activity and demand for raw materials. As a result, commodity-related stocks such as Marathon Oil, Devon Energy, Diamondback Energy, and ConocoPhillips were among the gains in the US stock market on Monday. The trend continued in Europe on Tuesday. For example, oil giants Eni and Total received price increases of 2-3 percent.
However, one must be naive enough to believe that “the danger is over”. Inflation is still skyrocketing and it won’t go away just because you focus on something else. New Eurostat statistics show that wholesale prices in the euro area increased by up to 5% from July to August. The figure was 0.1 percentage points higher than the economists’ average estimate. and on an annual basis the growth was 43.3 per cent. In the financial market, such metrics will contribute to higher long-term interest rates over time as lenders demand to be compensated for higher inflation. This, in turn, will put a brake on the share price.
