Pessimism floods the markets: stock markets plummet and sovereign debt bonds rise | Economy

The flight from riskier assets is causing a real upheaval in financial markets. Monetary authorities are having difficulties dealing with the inflation-growth binomial. If the increases in interest rates with which the central banks seek to stop the rise in prices go too far, the advance in GDP is put at risk as financing becomes more expensive. And if they fall short, the danger of a price spiral is accentuated, and with it the tensions on consumption and the margins of companies increase. In this context, the bad inflation figure for May in the US has tipped the balance: investors are discounting the possibility that the Federal Reserve will be pushed to raise rates more aggressively this year, which threatens to trigger a recession in the first economy on the planet.

The consequences of that growing uncertainty are visible in the markets this Monday. The stock markets deepened the falls of recent weeks, with falls of 2.47% in the Ibex 35 to 8,183 points, and a similar crash in the Eurostoxx 50. The Spanish selective has lost nearly 7% so far this year, and although its behavior is being better than that of its European peers, it was also worse last year, when the rest recovered more strongly, and it was expected that this 2022 could take flight with the boost of European funds and a powerful Spanish recovery to which the war in Ukraine and the subsequent energy crisis have reduced enthusiasm.

In the main US indices, the bleeding was even worse, with the S&P 500 down 3.5% and the Nasdaq technology more than 4% midway through the session. The tremors also reached the debt. The risk premiums of the countries of the European periphery continue to rise. Spain’s rose above 130 points, Italy’s exceeded 240, and Greece’s is around 280, thresholds not seen since the pandemic. Behind these movements is the increase in the yield of ten-year bonds, which in the Spanish case is close to 3%, the maximum of 2014, in the Italian 4%, and in the Greek 4.5%, which contributes to raising the differential with the German, of 1.6%.

In a less orthodox, but increasingly widespread investment, such as cryptocurrencies, there was no respite either. Increasingly interconnected with the Stock Exchanges, they staged their umpteenth day of losses, with bitcoin breaking down to $24,000, this time before the outbreak of the Celsius Network crisis, one of the large platforms, which froze fund withdrawals to its clients due to liquidity problems.

In parallel, safe-haven values ​​are functioning as such: gold remains at historically high levels beyond 1,800 dollars, and the dollar is not far from a parity with the euro that has not been seen for 20 years. For its part, the ten-year US bond offers a 3.28% yield, the highest since 2011. Only the Japanese yen is failing to fulfill its usual role as a refuge from turbulence: its central bank has opted for a monetary policy flexible that has brought the currency to a 24-year low against the dollar.

He knows in depth all the sides of the coin.


Natalia Aguirre, Director of Analysis and Strategy at Renta 4, sums it up like this. “On Friday, data from the American CPI was expected to confirm that we would have already seen the inflation ceiling in the US. And it was not like that, but it returned to mark a new maximum. In the case of Europe, it is also not clear where the inflation ceiling is, especially taking into account the high energy dependence and the embargo on Russian crude oil. So central banks face the difficult scenario of having to prioritize controlling inflation over growth, and the market is increasingly pricing in rate hikes to control inflation.”

Fed earrings

In that scenario of red, red, redder, everyone looks to this week’s Federal Reserve meeting. The market anticipated increases of 50 basis points for June and July, but the 8.6% inflation in May has been a negative surprise, and now it is speculated that the Fed will go further by announcing increases of 75 basis points, something not seen since 1994 , which would be a jug of cold water for consumer spending, business activity and growth in general. Analysts at ING do not expect the US monetary authority to go that far, and remain somewhat optimistic about the US economy amid skepticism. “Although household incomes are not keeping up with the rising cost of living, consumers seem willing to spend some of their accumulated savings to maintain their lifestyle.”

Prices in the euro zone are not evolving very differently from those in the US. They stood at 8.1% in May, just five tenths below that of the North Americans, which maintains pressure on the European Central Bank. Its president, Christine Lagarde, promised to avoid fragmentation in the debt markets, that is, that the risk premiums of some countries skyrocket compared to others, but she has not revealed what instruments she has to stop this outcome, a time seems exhausted the recourse to whatever it takes —I will do whatever is necessary— which in the past was enough for former President Mario Draghi to save the furniture.

Draghi now faces the crisis from another position, that of Prime Minister of Italy. His name is an antidote to the anxiety of the markets. But up to a point. He himself has warned him several times since he began his mandate a little over a year ago. But now, just as his administration is facing its greatest internal turbulence, there are signs from abroad that no shield is bombproof. The Italian risk premium stood at 243 points on Monday, a new maximum that places the increase at 108 points so far this year. The highest point since confinement was decreed due to the covid-19 pandemic, reports Dani Verdú.

At its last meeting, the Governing Council of the ECB undertook to raise interest rates by 25 basis points in July, the first rate increase in eleven years, as well as to raise the price of money again in September to a even more intense pace. In her appearance before the press last Thursday, Christine Lagarde recalled that the ECB has instruments to combat fragmentation, such as the ability to reinvest debt acquired under the anti-pandemic program (PEPP), which will be implemented with total flexibility of time and jurisdictions. However, the lack of details in her explanation created a palpable climate of insecurity in southern European markets such as the Italian, Portuguese or Spanish.

This lack of precision in detailing future plans that accompany the decision to raise the price of money has raised some criticism in Italy. However, the transalpine country has also not completed the tasks required by the European Commission to receive the funds from the Recovery Plan, and this also raises some concern from Brussels.

This Tuesday the German Isabel Schnabel, a member of the Governing Council of the ECB, may give new clues in the conference she gives in the great amphitheater of the Sorbonne University in Paris on financial fragmentation in Europe. Meanwhile, investors sell the risk of stocks, cryptocurrencies and the most indebted countries. Baron de Rothschild used to say that the best time to buy was when there was blood in the streets, a way of pointing out that at that time almost nothing could be further devalued because fear was at its highest. In the markets, however, the hard part is guessing whether the war is ending or just beginning.

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