The decline in equity markets continues

The equity markets fell sharply again yesterday, particularly US technology stocks (Nasdaq), which dropped another 4.3%. They are down 10% since the Fed’s decision to raise its key rate by 50bp last week (see the last Macro & Oil Weekly Report) and 26% since the beginning of the year. Futures turned around after the US market closed, but for no real reason.

The problem for the equity market remains: valuations are still high while monetary tightening has only just begun, which translates into a sharp rise in long-term rates (the US 10-year, which is now above 3%, has climbed 150bp since the beginning of the year) and will lead to a sharp global economic slowdown that will result in a downward revision of the earnings outlook. US GDP has already contracted in Q1, partly due to inventories, but mostly due to the trade deficit. Less exposed than Europe to the war in Ukraine, the US will not be able to escape the following toxic combination: rising commodity prices weighing on purchasing power, slowing external demand (Europe and China for different reasons) and strong monetary tightening (higher credit costs). One might add that the strengthening of the dollar, while helping to limit inflation, is accentuating the external deficit through the loss of competitiveness of US products. For Europe, the problem is exactly the opposite: the weak euro supports activity but reinforces imported inflation. The EUR/USD exchange rate is recovering a little this morning at 1.0570.

ZEW survey in Germany and NFIB (US small business survey) on the economic agenda today. The next big market mover is the US inflation figures tomorrow.