The time of optimism, which prevailed on the financial markets, seems already far away. Indeed, if last year investors got along rather well with the bad news, with ultimately quite limited corrections on the equity markets, the situation seems to have changed somewhat at the start of the year. The main "market mover" is naturally to be sought from the side of the Fed (see our last two meetings on Monday). Indeed, after having been behind the curve for a long time, the Fed is trying somehow to catch up to try to curb inflation with a much larger hawkish turn than initially anticipated by the markets and which crystallizes some of the tensions at the start of the year.
This week's FOMC, although the first of the year and therefore traditionally without major announcements, is proving to be high risk. The Fed will thus have to clarify its position on its will, announced during the last minutes of the FOMC in December, to reduce the size of its balance sheet. It will also have to try to give visibility to investors on its rate hike schedule, the latter now anticipating 4, or even 5 increases, in key rates for this year with, for the most pessimistic, a first increase of 0.5% (i.e. 2 rate hikes at once) from the month of March.
Since the start of the year, these expectations have led to a notable rise in long-term rates. American 10-year yields thus reverted to their pre-crisis levels of 1.90% (against levels of 1.5% at the end of last year), dragging European yields in their wake, with the German 10-year yield, for example, returning to positive for the first time since 2019. This movement in rates caused a sharp repricing of the equity markets, in particular technology stocks and so-called “growth” stocks, with an equally important sector rotation. For example, the European oil sector has risen by nearly +6% since the start of the year, while European technology stocks have lost 11%.... This risk off feeling has finally made it possible to halt the rise in the long rates in a movement of flight to quality.
To make matters worse, the market must also juggle the weakness of macroeconomic indicators, impacted by the Omicron variant at the end of last year (the German government, for example, revised its growth forecast by half a point for this year), and with the resurgence of political risks (who will carry out the Italian recovery plan in the event of the election of Mario Draghi as President?) and geopolitical (Taiwan and Ukraine).
While we remain cautious ahead of Wednesday's Fed meeting, we consider that the market has already priced in almost all of the bad news. Earnings season and/or an unsurprising FOMC could be positive catalysts for markets in a capitulation phase.
Without predicting the evolution of the Ukrainian situation, we keep in mind that you have to buy at the dip.
