Sitting in the name of nervousness for the stock exchanges. The main European lists are moving in negative ground, sunk by fears for the resurgence of Coronavirus infections in Europe which is in the midst of the fourth wave. The focus on inflation is also influencing the climate, the level of which is monitored in view of possible increases in the cost of money by central banks.
To add fuel to the fire were the words of Isabel Schnabel, a member of the Governing Council of the ECB, who in an interview with Bloomberg said that “inflation in the euro zone will increase more than expected next year and there is the risk that consumer price growth may remain above the European Central Bank’s medium-term target ”.
Last night, in the meantime, Jerome Powell was confirmed at the helm of the Fed, the US Central Bank. The move brought attention to a possible acceleration in the US rate hike in 2022. Powell’s second term brings closer, according to analysts, the hypothesis of three rate hikes in the US over the next year and starting in June . It was the euro that paid the price: the single currency dropped to levels it hadn’t seen since June 2020.
In the middle of the morning in Piazza Affari the main index, FtseMib, lost 1.2% while Frankfurt fell 1.10% with the Dax. The decline in London’s Ftse100 was less severe (-0.20%).
The new tensions are affecting above all the bond sector with rising yields across Europe. The BTP / Bund spread also rose again in the morning, reaching 127 basis points. At the same time, the 10-year BTP yield jumped to 1.02%, back above the 1% threshold. Overseas, the T-Bond rate is 1.63% (+9 basis points).
«The inflationary forces have already been set in motion – says Althea Spinozzi, Senior Fixed Income Strategist for BG Saxo -. Another lockdown could further exacerbate inflation as consumption will shift from services to goods, putting more pressure on prices. Meanwhile, politicians have begun to open up to the possibility that the risk of upside inflation may persist throughout the winter. Therefore, it is unlikely that expectations of short-term increases will be reversed despite the new measures in place ».
For the expert, the lack of collateral in the euro area helps to keep short-term yields compressed across the euro area, including the periphery. At the same time, swaps with the same maturity expanded as they adjusted to expectations of interest rate hikes. The demand for collateral will remain strong until the end of the year. However, 2022 opens up to a risk of rising yield rates as demand for collateral will begin to decline and the front of the yield curve will move higher based on expectations of interest rate hikes.