After a sprint start to the year, the international stock markets closed the month of February overall once again showing a certain weakness, with theindice Global Equities which despite showing a progress of 4.7% since the beginning of the year, slowed down by -2.8% in February, even if different speeds still emerge between America and Europe.
Europe better than Wall Street
In detail, if on the one hand the Asian and American indices showed a negative performance, with the CSI300 which closed February with a drop of -2.1% and the index S&P500 a drop of -2.3%, in Europe the trend was still positive, with the index EuroStoxx600 which achieved an increase of +1.9%.
Shopping also in Piazza Affari, with theindice Ftse Mib which closes the second month of the year outperforming the European index with a progress of +3.6% close to 27,500 points, close to the highs for the period achieved in mid-February and ever closer to the highs recorded in 2021.
From this point of view, Equita’s analysts “justify” the outperformance of the European indices compared to the American ones, also thanks to a more favorable sectoral composition to deal with the current macroeconomic context characterized by rising interest rates, but also because benefited most from the sharp reduction in rischio “energy crunch”, with the price of gas in Europe falling further also in February (-84.8% from the August highs above 300 euro/MWh), the month in which it lost more than 17% month on month, settling at €48/MWhlowest levels since September 2021.
Volatility rises, raw materials fall
In the last month of trading, market volatility started to rise again, with theindex VIXthe fear index, which closed February with a 9% increase, thus finding itself at 21, but still far from the alert level above 30.
In February, the performance of raw materials was negative, with Bloomberg Commodities Index which fell by -6%.
Sales especially onoro which returned to $1.810 an ounce, with a drop of -6% and this due to the increase in US real interest rates (+30bps to 1.55%) and thanks to the strengthening of the US dollar, with the US Dollar index in progress of +3%.
Oil is also down, with the Brent which closes February at $82 per barrel, with a drop of -3% (-32% since June 2022); but also on copper at $8,800 per ton).
The bond goes up
As far as rates are concerned, the yield of the bund tedesco rose +30 basis points to close at 2.6%, while the Italian decennial rises by +27 basis points reaching 4.43%, with a spread BTP-Bund broadly unchanged at 184 basis points.
In terms of the spread, in the next few days it will be necessary to verify the impact of the Government’s decision block the transfer of tax credits sui bonus edilizi/ superbonus, an element that could create some element of uncertainty on the spread united at the beginning of Quantitative Tightening (QT), which we recall is a tightening monetary policy tool used by central banks to decrease the amount of liquidity or money supply in the economy.
Focus on interest rates, inflation and the labor market
After the central banks had opened up to a less aggressive stance since the beginning of the year, the latest macroeconomic data, and in particular those relating to inflation, have once again suggested that the current restrictive monetary policies may be needed for longer than expected, with Bullard, the president of the St. Louis FED, who has not ruled out the possibility of resorting to a 50bps hike at the next FED meetingagainst a market expectation of a last 25bps hike, immediately after the FOMC meeting in early February.
The data on labor market in the US were significantly stronger than expected, with the non-farm payroll index rising by 517k in January, nearly three times expectations, while the unemployment rate dropped to 3.4%, least since 1968.
Continue to worry even the level of inflationwhich has been demonstrated in the latest surveys (in France, Spain and Germany). stronger than expected and this element also contributes to increasing the probability that the FED and the ECB will be forced to raise rates and keep them higher than initially discounted by the markets, with risks also for the economy.
On the subject of inflation, it should be noted that the namely US Breakeven 2Y USAthe rate reflecting the market estimate of 2-year inflation, it rose to 3.1% from 2.3% at the start of the monthwell above the Fed’s inflation target of 2%.
Also, another important thing is that market expectations now point to a probable US interest rates peak at 5.4% (implied FED Funds rate 5.25-5.5% from current 4.5-4.75%) compared to 4.8% in early February, followed by a drop to 5.1% in January 2024.
In Europe, the ECB’s deposit rate is currently at 2.5%, with the market pricing in a hike of up to 3.7% by September 2023. In this sense, Equita analysts warn that higher real rates mean higher discount rates for the valuation of equity which must be more than offset by higher estimates to lead to higher share prices, a scenario which Equita seems unlikely to occur in the near term.
PMI indices rebound
The data shows that the demand is proving to be more resilient in the face of ongoing monetary tightening and that the ongoing supply damage caused by the pandemic is limiting the moderation of inflation.
In this sense, the PMI indices for the euro area and the USA continued their rebound also in February, respectively at 51 and 49, and this thanks to the easing of the headwinds deriving from the EU energy crisis and to the improvement in the purchasing power of consumers due to the drop in inflation in recent months.
Low probability of recession
To date, the snapshot is that the probabilities of a recession remain low at least in the first half of 2023, while for the financial markets the even more probable scenario is that of “soft landing” (soft landing). However, according to Equita “this process of rapid monetary policy adjustment increases the risk of an unwanted sharp economic slowdown by central banks (in the second half of 2023/early 2024), with risk on corporate profits”.
From this point of view, the most interest sensitive sectors are already showing significant slowdowns: the demand for mortgages in the USA is recording the sharpest contraction for at least 30 years (-57% yoy in February), with current rates (>7% over 30 years) suggesting further deterioration.
The US 10Y-2Y yield curve remains strongly inverted, continuing to signal a high probability of a recession to come. “Our conclusion is that short-term risks are tilted towards more central bank action that could impact the economy and corporate earnings, and therefore we prefer to maintain a neutral stance on equities favoring quality stocks over cyclicals ”, Equita analysts comment.
Other elements that have contributed to improving the short-term picture are represented by reopening in Chinaas well as the aforementioned easing of concerns related to the energy crisis.
The best sectors of the Ftse Italia
In the table below we see the performance of the sectors of the Ftse Mib both in absolute form and relative to what has been achieved by the Ftse Italia All-Share index
The Best of Piazza Affari
The worst of Piazza Affari
Stocks that achieved the worst performance in February