Dead cat bounce rather than turning point

Yesterday, equity markets rebounded in a way that reminds us of the volatility of the spring of 2020, with the main European indices rising by 7 to 8% and the US by 2 to 4%. This burst of optimism seemed to come mainly from 3 factors: statements by a Russian official opening the door to negotiations, the sharp drop in oil prices after the United Arab Emirates seemed to support the idea of increasing OPEC production (see Daily Oil) and finally the measures prepared by the EU to deal with the consequences of the war in Ukraine. At this stage, this rebound seems to be part of a period of high volatility led by deep buyers and is nothing more than a “dead cat bounce”. It was logically accompanied by a continued rise in long-term rates (US 10-year at 1.93% and German 10-year at 0.21%) and a clear weakening of the dollar, with the EUR/USD exchange rate rising to almost 1.11.

Today, there are again 3 events that should guide the markets. Firstly, the ECB meeting: a strong downward revision of growth forecasts and an upward revision of inflation forecasts are expected. Monetary tightening does not seem to be on the cards for the time being. Then we have the US inflation figures, which are expected to rise again in February to 8%. And finally, the European summit taking place today and tomorrow in Versailles, where measures to deal with the consequences of the war and the revival of the European defence policy will be discussed. After yesterday’s session, the markets will be sensitive to the slightest disappointment.