Markets that are “impossible to decline” of the world economy scenario are curbing risk appetite – #Markets #impossible #decline #world #economy #scenario #curbing #risk #appetite

LONDON/NEW YORK, Feb 22 (Reuters) – Markets are bracing for a “no recession” scenario in which global economic growth holds steady and inflation stays higher for longer, reducing appetite for both risky assets and sovereign debt.

For months, investors have been betting on global growth softening enough to cool inflation and persuade hawkish central banks to hold off on rate hikes.

USA The notion that the Federal Reserve and other central banks are using monetary tightening to do a soft, gentle landing before pivoting to avoid a deep recession has fueled a rally across assets since October, depressing the dollar and sending capital flowing into emerging markets.

But the latest data, which still reflects tight job markets, is entertaining traders with a new scenario where economic growth continues and inflation remains sticky.

This means that rates could also be raised – a negative for risky assets. Global stocks hit a one-month low on Wednesday, while Wall Street had its worst day of the year on Tuesday.

“We’ve gone from a softer recession to no recession – no recession (funding) conditions will remain tight,” said David Katimbo-Mugwanya, head of fixed income at EdenTree Asset Management.

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In January USAjob growth in USA and in Germany inflation remained high, business activity in the US and Europe revived in February.

Investors have now given up on expectations of a rate cut later this year and renewed their bets on higher rates in the US, which rose to 5.3% in July from around 4.8% in early February.

US interest rate hike expectations rose again

Deutsche Bankthis week Europe He said he expected the Central Bank to raise interest rates to 3.75% from the previous 3.25%.

Richard Dias, founder of macroeconomic research house Acorn Macro Consulting, China’s reopening, Europe’s gas The easing of the recession and strong US consumer spending are “more bearish than positive for markets,” he said.

“Good news, bad news news we are in the situation,” he said.

For Paul Flood, head of mixed assets at Newton Investment Management, “labour “If interest rates remain high and demand remains high, then the Fed will raise interest rates further, and that’s not a good environment for the stock or bond markets.”

A bond when expectations of higher cash rates make fixed interest payments less attractive prices falls and incomes rise. Stocks typically move lower when bond yields rise to offset the added risk of owning stocks.

of the United States 10 annual treasury revenues, january It is nearing its highest level since November at almost 4%, down from 3.3% in March. An index that measures the dollar against other major currencies was set at five for its first monthly gain as interest rate hike bets lifted the greenback.

GOODBYE RECESSION RISK?

In December, most economists expected the U.S. economy to contract slightly this year, but the consensus is now for 0.7% growth. Fed officials have hinted that they may be raising interest rates for longer than previously forecast.

Reuters graphics

Expectations of a recession in the eurozone were largely dampened by lower energy prices in mid-January. Economists polled by Reuters expect inflation in the bloc to remain above the 2% target until 2025 and growth to continue.

“The roadmap was one of a shallow recession and declining inflation,” said Florian Ielpo, head of macro at Lombard Odier Investment Managers. “Data to this consensus protest does.”

Many investors still believe inflation will ease and see the recent strong data as likely supported by one-off factors such as an unusually mild winter and the rest of consumer savings built up during the COVID-19 pandemic.

“There should be more signs of a slowdown as the year progresses and the weather normalizes, and there is no more accumulated savings to spend heading into the second half of the year,” said Rhys Williams, chief strategist at Spouting Rock Asset Management. .

Thomas Hayes, chairman and managing member of New York-based Great Hill Capital, said declining rents in the United States inflation as it begins to affect its performance and consumers’ savings are depleted labour said there is still a possibility of a soft landing as market participation increases.

“Oil 10If it doesn’t rise above $0, it will be very difficult for inflation to accelerate again after the Fed’s pauses,” he said.

Lombard Odier’s Ielpo, january He said he hasn’t changed his fund’s position significantly since May, but is “happy not to have more equity exposure.”

Katimbo-Mugwanya at EdenTree Asset Management says long-term bonds are still worth it as central banks are still closing in on the end of rate hike cycles offer he said he did.

But, he added, because “the data is a little more robust on the economic front than we believed at the beginning of the year … there’s no pressure on them to start taking a softer stance yet.”

Reporting by Naomi Rovnik in London and Davide Barbuscia in New York; Additional reporting by Yoruk Bachchali in Amsterdam, Editing by Dhara Ranasinghe and Kirsten Donovan

Our standards: Thomson Reuters Trust Principles.

2023-02-22 17:14:01
Source – reuters

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