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Amundi warns, ECB rates could reach 4%

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Amundi warns, ECB rates could reach 4%

The stellar rally in European equity and bond markets has gone too far, according to the Chief Investment Officer of Amundithe region’s largest asset manager, warning that markets are ignoring the possibility that US rates BCE can go up to 4%.

“Markets are pricing in a sort of Goldilocks scenario,” he commented Vincent MortierCFO Amundi where there is “still some sort of GDP growth, earnings remain decent and central banks are taking a breather from aggressive rate hikes.”

In January the index MSCI of European equities outside the UK, it rose by8,8%. The rally coincided with China‘s easing of Covid restrictions and a sharp decline in demand for gas in Europa thanks to a mild winter.

But markets are ignoring the risks of sustained high inflation and a campaign to hike rates by the European Central Bank that would hurt consumer spending and corporate margins, Mortier said.

The ECB will meet on 2 February and according to analysts’ expectations it should raise the rate on deposits by 50 basis points bringing them to 2,5%.

Read also: ECB, Lagarde insists on rates: against inflation they must be raised steadily and significantly

For Amundi ECB terminal rate at 3.25%

According to the forecasts of the asset manager, the ECB will bring rates to 3,25%although Mortier said he personally believes they could go up to the 4%.

We think inflation will surprise and remain persistent and the ECB is determined to be aggressive,Mortier commented for Reuters.

Having initially predicted that shares would plunge in the first half of 2023 before recovering, Amundi has now chosen a “circumflex” to illustrate their path, Mortier said, referring to the French accent which is shaped like an inverted V.

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After starting the year with an “underweight” position on European stocks, reflecting Amundi’s expectations of their weakening, he is currently discussing whether to strengthen this position.

We could expect a 15% to 20% consolidation from current levelson European stock indices, Mortier said.

Il rally “it may still last weeks or months, but the decline, the normalization, will take place“. The power behind the rally, Mortier explained, came from US hedge funds that are executing a positioning designed to protect investor portfolios from a US recession in 2023.

Amundi, caution on the bond market

In addition, Amundi also warned investors about the bond market, where the yield is in January Bund German 10-year declined by 45 basis points. We will profit from the current levels of the German Bund”

After the Federal Reserve’s rate-hiking cycle is halted, continued ECB hikes could lead to a weakening dollar, Mortier said. Amundi’s current target on the euro/dollar exchange rate is $1.14 by the end of 2023.

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