Disappointed, European stock markets throw in the towel and turn to Wall Street
At the end of the first half of September, the month that represents the return to full activity in the markets after the long summer break, European stock markets are showing their weakest side. Touched, but not yet sunk by the rise in interest rates to 1.25%, which is only the last step towards the 2% mark this year, the European indices continue their particular downward path in this very complicated 2022.
The feeling of impotence produced by the European stock markets is growing. On the one hand, the major world funds are gradually reducing the weight they assign to the Old Continent's stock markets. In this scenario, the continued flight to liquidity seen in all global markets is particularly important in Europe, where, according to the latest Bank of America survey, 86% of managers are betting on a recession.
Half of the managers believe that further falls are on the way for European stock markets, which have already accumulated losses of between 10 and 25% this year. "It is not unreasonable to think that the falls could double in the medium term. The big correction is still to come, because everything suggests that a long period of very high inflation, economic slowdown and more interest rate hikes lies ahead", says a reputed manager of a large national firm.
Against this backdrop, all eyes in the market are on Wall Street. The US stock market has always been the watchword of global indices, but the dependence it now generates is extraordinary. Analysts believe that the European stock markets, which are still battered by a late rate hike, have lost their autonomy and are now dependent on the performance of the Dow Jones or the Nasdaq. Or, in other words, how Wall Street will fare in the harsh reality that lies ahead. In the middle of next week, the Federal Reserve meets to decide on a rate hike that a significant part of the market is beginning to value at 100 basis points. A real barbarity at this stage of the film, because inflation is not letting up and there is no minimally reassuring price data that would allow us to lower our guard.
US indices are going into the meeting with cumulative falls this year of between 15 and 25%, with the rate hike cycle well ahead of the euro zone. But things could get much worse. In the worst case scenario, in which the economic slowdown pushes the US unemployment rate to 6%, Goldman Sachs believes that the S&P 500 could fall by as much as 27%. A full-blown crash.
The sense of fear is growing. The US courier giant Fedex's profit warning on Friday is just the latest warning that a violent adjustment is simmering in the market. Meanwhile, Europe is looking across the Atlantic with growing misgivings, because the shadow of recession is getting longer and longer and, above all, because there is a growing feeling that it has not done its homework in time.
A Fed rate hike of 100 basis points would put brutal pressure on the European Central Bank (ECB), which could arrive at the October meeting with the evidence that it still has almost all the work to do. And it would force the euro zone stock markets into an adjustment that could be severe. With managers retreating to their very comfortable liquidity positions, it is time to hope that Wall Street's constipation does not go too far.
