Business activity is slumping and higher inflation persists. Central banks are responding with aggressive rate hikes without fully acknowledging the growth damage. The new regime of macro volatility is taking root with weaker growth, persistent inflation and volatile markets.
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BlackRock have argued since March that the energy crunch will drive a recession in Europe The crisis has worsened since then as Russia has halted gas supplies. Plus, the European Central Bank (ECB) isn’t acknowledging how it will crush activity further by trying to fight high inflation, in BlackRock’s view.
Headwinds persist and volatility remains, and investors seem to be looking beyond the immediate issues that have been weighing on stocks, giving the market short-term, risk-on moves higher.
Franklin Mutual Series’ Investment Strategist Katrina Dudley believes that higher inflation in Europe stemming from rising energy prices, as well as lower relative interest rates, may keep the euro under pressure.
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BlackRock have argued for a while that they’re in a new macro regime. Central bankers at the recent Jackson Hole forum started to recognize this reality. But BlackRock think they’re not prioritizing economic implications over pressure to curb inflation.
The ECB will be a key focus on Thursday as it considers accelerating the pace of interest-rate hikes. The market is placing about a 70% probability on a 75-basis-point increase, which would be the ECB’s single biggest hike since its inception. Sticking with Europe the energy crisis will remain front and centre given the Nord Stream 1 shut down. Markets will also be watching German Industrial Production data, out on Wednesday.
The euro traded through parity versus the US dollar last week given a gloomy European economic backdrop. Gas prices remain in focus, with Nord Stream 1 scheduled to shut down for three days of maintenance on 31 August. The EU just called an emergency meeting of energy ministers to discuss bloc-wide solutions to the spike in power prices.
Energy prices continue to be a focus for markets. Both European and US futures markets trade up to their respective 200-day moving averages but fail to break through and quickly pull back last week. Outside of equity markets, the US dollar had a notable move higher again last week, with the Dollar Index (DXY) up 2.3% and trading back near multi-year highs.
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