Will the financial markets collapse? – 09/12/2022 at 09:02

Will the financial markets collapse?  - 09/12/2022 at 09:02
Jean-Paul Betbeze

Jean-Paul Betbeze

(Photo credits: Adobe Stock - )

(Photo credits: Adobe Stock – )

Between the war in Ukraine, galloping inflation and rumors of recession, financial operators are being put to the test. On both sides of the Atlantic, the monetary weapon takes precedence. Jean-Paul Betbeze explains why the markets will resist the rise in interest rates

Will the financial markets collapse? No. Resist by moving, rather. After the increases in the United States and the euro zone of 0.75% which have just taken place, respectively at 2.5 and 1.25%, the markets will look, in this world full of risks, for opportunities to exploit and the securities to be sold, by being informed as much as possible by what the Fed and the ECB want to do, which are (still) their beacons. It is not a question of countering them, that would be ruinous, but of knowing how far they will go in raising their short-term rates and managing their treasury bonds, and therefore in raising long-term rates. What will this new balance of growth not too inflationary look like, at what rates and when will it be obtained?

Let’s start with the Fed. The financial markets, which are said to process information best, have some work to do between the technological revolution which is continuing, China which is slowing down and the war in Ukraine, which is accelerating inflation everywhere. In this confused world, let’s go to Jackson Hole on August 26, where Jay Powell, the chairman of the Fed, gives us a simple and brief message: fighting inflation is his primary mission. It is now taking precedence over its other mission, employment, given that the labor market is already too tight, fueling the rise in wages and prices. The Fed will therefore continue its hikes: do not expect from Powell this wait-and-see attitude of Arthur Burns, his distant predecessor, who forced Paul Volcker to raise rates to 20% in June 1981, pushing inflation from 13.5% in 1981 to 3.2% in 1982, but with a recession in 1982-1983 and an unemployment rate of 11%.

Let it be said: Powell will raise its rates, say to 4 or 5%, knowing that growth will have to continue to decline. But with the current unemployment rate at 3.7%, that leaves him some leeway. He will assume that layoffs will calm wages in certain services, pushing the unemployed towards others, less in tension. He also knows that the stock market has integrated its rhythm of increases of 50 basis points per Fed meeting, to worry before, each time, of an increase of 75 points, then to swallow it. And yet here are two quarters where the GDP has been falling since January, does Powell want to go towards a “medium recession”? He won’t be Burns or Volcker.

Let’s go to the ECB. Still in Jackson Hole, on August 27, Isabel Schnabel, a member of its Executive Board, speaks. And which announces even worse news, greater interest rate increases, therefore with a higher unemployment rate. She will say in particular that companies adjust employment less than before when interest rates rise, with their more complex structures and having more and more intangible assets in their balance sheets, therefore an investment less sensitive to its cost of financing. So expect big interest rate hikes, like this September 8th. The credibility of the central bank in its steering according to expected inflation (foreward guidance) has suffered from having missed the current surge in inflation. Will we be back to the original ECB, the one born out of BUBA, which would pay less attention to the Italian situation? Much less Draghi, much more Trichet?

Let’s move on to China, where the Central Bank talks very little, but has just cut its rates another 5 basis points to 3.65%, following the 2.6% drop in its GDP from one quarter to the next. another at the start of the year, in connection with the policy of these anti-Covid lockdowns which are lowering the yuan, plus the real estate crisis. The fact remains that China exports more goods and services than ever and Russia more oil than ever. China benefits from American and European budgetary support, Russia from its gas, its oil, its wheat and its de facto allies.

Interest rates will therefore rise in the United States and in the euro zone, weigh on growth, especially in the euro zone and in Italy, the dollar will rise against the euro and the yuan. All without major market crashes, with an IMF on the lookout, assuming of course no other Russian madness.

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