Dhara Ranasinghe looks ahead to the day’s markets.
The market chaos from last week, which caused the biggest weekly drop in world stocks since March 2020, has died down. But don’t think it will last.
In short, volatility will remain until there are clear signs that inflation in major economies is coming down from decades-high levels, which would allow central banks to stop tightening money.
The fact that Germany’s most powerful union, IG Metall, wants to raise wages by between 7 and 8 percent in the next round of negotiations is a sign that price pressures are becoming more widespread. It’s not surprising that this caused European bonds to lose value late in the day.
Monday was a holiday, so U.S. bond markets were closed. In early London trade, however, yields were going up.
Also, pay attention to what Christine Lagarde, the head of the ECB, said Monday night. She said that there is a high chance that Europe’s financial and housing markets will change quickly. She also said that the risks to financial stability have “clearly grown” since the beginning of the year.
Some people worry that the sharp drop in prices in global markets is tightening financial conditions faster than expected, which could lead to a sharp slowdown in the economy.
Axa Investment Managers says that the cost of funding for investment-grade companies in the euro area has risen above 3 percent for the first time since June 2012. This means that the interest rate has doubled in less than three months.
But some central banks are pushing back against the idea of raising rates too quickly. Philip Lowe, the head of the Australian central bank, said on Tuesday that more policy tightening is coming, but he played down the chances of a 75 bps move.
Futures for U.S. and European stocks are also up, as are futures for stocks in Asia. There’s also a break for Bitcoin, which hasn’t been able to break strongly below the psychologically important level of $20,000 in recent days.
Graphic: MSCI World Stocks Index, weekly change – https://fingfx.thomsonreuters.com/gfx/mkt/klpykrdojpg/stx2106.png
Tuesday should see a number of important events that should give the markets more direction:
– Japan’s Prime Minister Kishida shows that he wants the BOJ to keep its easy policy.
– Pay deals in the UK stay at 4 percent as inflation rises: XpertHR – Andrea Enria, the bank supervisor for the ECB, and Olli Rehn
– Christian Lindner, the German Finance Minister, talks
– The Philadelphia Fed Survey of businesses that don’t make things for June
– Home sales in the U.S.
