Financial markets panicked over rising rates and accompanying recession risk

Every day, global monetary policy tightens a little more. The world’s central banks keep announcing new rate hikes in a bid to stem runaway inflation. This is the recent case of the Bank of England (BoE), which announced this Thursday a fifth consecutive rise in its reference rate in the face of a rise in inflation prices that, according to him, should exceed 11% this fall. Similarly, the Swiss central bank also raised its key rate on Thursday, for the first time since 2015. Not to mention the Fed, the US central bank, which raised rates again on Wednesday. This increase of three quarters of a point is the strongest since 1994. Finally, on the side of the European Central Bank, its governors announced on June 9 their “intent to raise policy rates by 25 basis points at July meeting” then again in September.

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So many announcements that it plunged global stock markets on Thursday. European indices closed in the red. Frankfurt, Milan and London lost more than 3% while Paris lost 2.39%. On Wall Street, the Dow closed down 2.42%, falling below 30,000 points for the first time since January 2021, while the Nasdaq index fell 4.08% and the broader S&P 500 index , 3.25%. For their part, Chinese stock markets fell slightly this Friday at the open. In early trading in Hong Kong, the Hang Seng Index lost 0.67% to 20,705.21 points. The Shanghai Stock Exchange Composite Index fell 0.40% to 3,272.25, while the Shenzhen market fell 0.82% to 2,089.51.

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The anxiety of a recession

“With the Fed’s balance sheet shrinking (which started in June) and markets expecting another 0.75 percentage point hike at the next Fed meeting,” operators wonder “if the Fed isn’t going astray”, and go too fast and too hard on its monetary tightening, said Quincy Krosby of LPL Financial. ” When people think about the impact that the simultaneous movement of all central banks could have” towards a general tightening, they say to themselves: I still have profit to take, come on»and start selling, explained Maris Ogg, portfolio manager at Tower Bridge Advisors.

Because the central banks are anticipating the main risk that a rate hike that is too high poses for the economy: that of a recession. In the United States, the US economy has already slowed with a 1.5% contraction in GDP in the first quarter. The beginning of the second quarter seems to show that the slowdown continues in certain sectors such as manufacturing, real estate and retail sales.

“The chances of recession in 2023 increase because it may be necessary to control inflation”, according to Joseph Gagnon, an economist at the Peterson Institute for International Economics (PIIE) and a former Fed economist, in a note. ” Let’s be clear, we’re not trying to induce a recession.” however, he assured Fed Chairman Jerome Powell: “We are trying to reduce inflation to 2% (and maintain) a solid labor market”.

Risk of fragmentation in Europe

Another consequence of a tightening of monetary policy, the ECB’s announcements worried investors, causing the sovereign debt of certain countries, including Italy, to increase. However, the tension eased a bit on Thursday compared to the beginning of the week thanks to the announcements from the European Monetary Institution. The latter, in fact, has instructed his teams “speed up” the design of a new instrument anti-fragmentation » to combat an excessive dispersion of interest rates between the northern and southern countries of the euro zone. German Finance Minister Christian Lindner said on Thursday that there was no “there is no reason to worry about interest rate differentials in Europe”.

Finally, these rate variations also had effects on the technology sector, which is particularly dependent on interest rates to finance its growth. In New York, the technology giants led the market decline, from Meta (-5.01%) to Apple (-3.97%), passing through Microsoft (-2.70%) and Alphabet (-3.40%). ). In Paris, STMicroelectronics lost 6.19% and Dassault Systèmes 2.50%. Deliveroo fell 6.19% in London.

Energy actions penalized by gas reductions in Europe

As for the values ​​of the energy sector, it is the successive announcements of lower deliveries of Russian gas by Gazprom in recent days, and in particular on Thursday, that have caused them to fall. “Our product, our rules. We don’t play by rules we don’t create.” so argued the capo of the Russian gas giant, Alexei Miller. “Russia is a reliable energy supplier for the friends of Russia”he added.

In Frankfurt, Uniper lost 9.73% and Siemens Energy 3%. In Paris, Engie fell 7.29% after pointing out a ” delivery reduction »even without supply impact » customers. Eni, which announced that Gazprom would only deliver 65% of the quantities requested on Thursday, also fell 4.89% in Milan while Enel lost 2.81%.

In international currencies, after a gloomy start to the session, the euro and pound rallied against the dollar, with the single currency gaining 1.03% to $1.0552, while the pound was up 1 outright, 39% to $1.2350.

As for bitcoin, it was up 5.11% at $20,754. The price of a barrel of North Sea Brent gained 1.09% to $119.81 and that of a barrel of American WTI gained 1.96% to $117.58.