After weeks of turbulence, the financial markets are taking a break

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“The market had to calm down and calmed down”, notes, a little relieved, the bond manager. A less wartime tone than expected since Wednesday’s publication of the minutes of the last monetary policy meeting of the US Federal Reserve, which took place on May 3 and 4, has already made it possible not only to stop the decline in the US. stock indices, which have been falling for the Dow Jones for 8 weeks, but also continue to fall rates. The rest was caused by a slowdown in inflation in the United States in April (+ 6.3% against 6.6% in March).

As a result, stock markets, driven mainly by technology and luxury stocks, are not far from the first two weeks of growth in two months. In terms of rates, they are back at levels closer to those desired by central banks, as if the markets are again in line with the Fed’s rhetoric. The two-year rate thus returned to about 2.5% in the United States after flirting with 3.5%, and the US “ten-year” rate seems to have stabilized at around 2.8%.

The yield curve thus returns to its pre-crisis configuration Covid: flat. A bit, as if the bond market was testing the peak before it came to its senses. Especially since the scenario of the upcoming increase in key Fed rates by 75 basis points now seems to be in decline.

Normal return to normal

The Fed will certainly continue to normalize its policies, because it must do so after the health crisis. It is true that inflation remains high, but this inflation is largely driven by energy prices over which the central bank has no influence. In fact, it is not an increase in rates that will stop the war in Ukraine or decide China to lift its leg in prison. However, a FOMC report suggests that the Fed could slow growth in 2023 in the event of a recession. A breath that immediately benefited stocks and especially growth stocks.

As a result, investors in the eurozone are reassured: US moderation is preventing European rates from skyrocketing. It is true that the ECB will start raising rates faster than expected, but will reach zero at the end of the third quarter. After all, nothing could be more normal, although key ECB rates are still in negative territory (-0.5%)!

On the credit front, the situation remains feverish with a prevailing feeling of recession risk. The main iTRaxx index, which measures the cost of protection in the event of a failure, remains at very high levels, between 90 and 100 basis points, after hovering around 50 in recent years, except at the beginning of the Covid crisis, when it climbed to 140 to descend just as fast.

Rates drive the market more than ever

A calming of rates could have a wave effect on the market as a whole, and on stocks in particular. After a sharp decline in recent weeks, which was almost interrupted since February 24, the date of Russia’s invasion of Ukraine, investors are waiting for a signal to return to stocks whose excess valuations have been adjusted. Especially since the latter are full of cash. Therefore, a stock rally cannot be ruled out.

Analysts will, of course, continue to examine retail profits and corporate profits or forecasts. The Gap textile chain thus lost almost 8% after the fall in profit forecasts. Technology stocks – The Nasdaq, which rebounded by 6% in a week while remaining down 25% since the beginning of the year, remains a point of uncertainty: has the cleanup ended or is the liquidation period underway? The development of rates will be a key element of the answer.

During the week, the reflection is significant: CAC 40 returns to the limit of 6,500 points to 6,515.75 points, an increase of 3.67% in five sessions. The Stoxx 600 Index has gained almost 3% since Monday. Growth is more pronounced in the United States, where the S&P 500 index occupies almost 6% and the Nasdaq technology stock index, which also aims for a 6% gain over five sessions.

The market is probably at a crucial moment: either it bounces off the bottom or a downward trend is confirmed. Inflation reports will be a judge of peace.