The vision of ever-increasing interest rate hikes in the US, along with worse macroeconomic data readings in the form of PMI indexes, may have negatively affected stock indexes on Friday 23.09.22. An addition to this was the UK's tax cut plan, which in the current situation could send investors into a tailspin.
As of 12:52 GMT+3, Germany's DAX is losing more than 2 percent, Britain's FTSE100 is down nearly 2 percent to 7036 points. (the lowest in 10 weeks) the broad Stoxx Europe 600 index of European companies has fallen 20 percent from its November 2021 peak to 391 points, indicating a potential downswing. The EU50 index hit its lowest level in 22 months at 3356 points, while Germany's DAX fell to 12354 points, its lowest in 22 months.
Announcements of more hikes, UK plan and weak data
There seems to be no good news in the markets today, but worse news, which may be reflected in the behavior of stock indices. Stock market investors face the prospect of increasingly expensive capital on both sides of the Atlantic, as ECB President Christine Lagarde has said that Eurozone policymakers will continue to raise interest rates over the next few meetings, and markets are betting that the ECB deposit rate could reach 3 percent by June 2023.
On top of that, there may be increasingly weak macroeconomic data, such as today's series of PMI index readings. They show that soaring energy prices continued to hamper economic activity in the eurozone, and September PMI data showed that the eurozone and German private sectors contracted for the third consecutive month. The S&P Global Flash Eurozone Composite PMI fell to 48.2 points in September 2022 from 48.9 in August. Excluding pandemic shocks, the reading was the lowest since May 2013. New orders fell the most since April 2013, excluding periods of pandemic restrictions, and the backlog of unfilled orders fell for the third consecutive month.
Source: Conotoxia MT5, DE40, D1
UK with fiscal plan
Financial markets may have been dealt another blow with the announcement of the implementation of the UK's £161 billion fiscal plan over 5 years, Bloomberg reported, which under the current circumstances could be a breakneck task with an unknown outcome. On the one hand, the Bank of England has announced the possibility of selling £80 billion worth of bonds within 12 months and further interest rate hikes, and the government may also raise funds from bond sales for its plans. This could lead to a bump in the British financial market, where bonds, stocks and the British pound seemed to cheapen even simultaneously.
Source: Conotoxia MT5, UK100, H4
Investors in the interest rate market now seem to be pricing in the possibility of a 1 percentage point increase in the Bank of England's main interest rate by November, in just over a month. To summarize the events in the UK in recent hours, per Bloomberg: the Truss economic plan is causing UK markets to collapse, the UK is planning the biggest tax cuts since 1972 to spur economic growth, UK bonds are falling as the government will increase borrowing more than expected, the UK is likely already in recession as the pound's weakness increases inflation.
What's next after such a sharp plunge in the markets?
It seems that financial markets need stabilization in expectation of central banks' actions. Currently there seems to be a chase for higher and higher possible interest rates in the future. Investors do not know where this race and festival of hikes will actually end. No one probably wants a situation in which a loan one month is at a given interest rate, the next month at a different one, and in six months the interest rate may be different. In such a situation, business cannot function properly, and neither could the financial markets.
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Daniel Kostecki, Director of the Polish branch of Conotoxia Ltd. (Conotoxia investment service)
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