Breakfast offerings: Why the calm in the markets does not last

A look at the coming day at markets from Dhara Ranasinghe.

Last week’s market turmoil, which triggered the largest weekly fall in world equities since March 2020, has allowed for some calm. But do not bet that it lasts.

In short, until there are clear signs that inflation in larger economies is declining from decades of high levels, allowing central banks to step out of the monetary tightening pedal, volatility will remain in place.

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News late Monday that IG Metall, Germany’s most powerful union, wants to push through wage increases of between 7% and 8% in an upcoming round of negotiations, is a reminder that price pressure is spreading. No wonder it triggered a late sale of European bonds.

Interest rates in the US bond markets, closed on Monday for a public holiday, are pushing up in early trading in London.

And note this comment from ECB chief Christine Lagarde, who spoke late Monday. She said the risk of a sharp correction in Europe’s financial and housing markets was high, adding that the risk of financial stability had “significantly increased” since the beginning of the year.

Some fear that the sharp sell-off in global markets will tighten financial conditions faster than expected, increasing the risk of a sharp economic downturn.

Eg. For example, the financing costs for investment-grade companies in the euro area have risen above 3% for the first time since June 2012, when interest rates have doubled in less than three months, according to Axa Investment Managers.

However, some central banks are pushing back against the idea of ​​overly aggressive interest rate hikes. Australian Governor Philip Lowe on Tuesday marked several political tightenings ahead, but downplayed the chances of a 75 bps move. Read more

Asian stocks are higher, as are US and European stock futures. And there is also a respite for Bitcoin, which holds over $ 20,000 after failing to break sharply below the psychologically significant level in recent days.

MSCI World Stocks Index, Weekly Movement

Key developments that should give more direction to the markets on Tuesday:

– Japanese Prime Minister Kishida signals that the BOJ prefers to pursue an easy policy

– UK wage agreements hold at 4% while inflation steams forward: XpertHR read more – ECB Banking Supervisor Andrea Enria; Olli Rehn

German Finance Minister Christian Lindner speaks

– Philadelphia Fed releases Nonmanufacturing Business Outlook Survey for June

Sale of existing homes in the United States

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Reporting by Dhara Ranasinghe; editing of Sujata Rao

Our standards: Thomson Reuters Trust Principles.

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