Rates and oil constrain equity markets

WTI oil has made another foray above $120 in recent days, its highest level since early March, only about ten dollars away from the peak reached a few days after the start of the invasion. Ukraine. Same tensions on Brent.

But beyond oil, it is also the prices of natural gas which are tending in the United States where we are now moving towards the levels of…2009! Natural gas prices across the Atlantic are now three times higher than in the months preceding the Covid crisis.

This pressure on energy caused US yields to rebound, with 10-year bonds stretching above 3%. But short rates also reacted amid fears over the Fed’s monetary policy. At a time when slight slowdowns began to appear on the American price indices last month (consumer prices, producer prices and even PCE inflation, the latter being closely monitored by the Fed), raising hopes of an inflation peak currently forming, this new acceleration in oil and natural gas prices in the United States could dampen hopes.

The US yield curve has partially flattened again in recent days, a sign of renewed fears about inflation and therefore about the intensity of the Fed’s monetary normalization. US 5-year and 10-year rates are moving at the same level (3.02% at the time of writing) and there is even an inversion between 7-year and 10-year rates, with the 7-year rate now being higher than the 10-year rate .

This rise in rates with partial flattening of the yield curve also comes at a time when the Federal Reserve is about to start reducing the size of its balance sheet, as it had clearly announced a few months ago. The balance sheet of the Fed has already stopped its progression for several weeks, flirting with 9000 billion dollars. The Fed announced that the downward adjustment would be relatively dynamic, so we will not see the same wavering phase as after the end of post-subprime crisis “QE”. At that time, the balance sheet had “floated” for a long time between 2015 and 2017 before falling in 2018, which fueled the market correction phase at the end of 2018, also in a context of tensions between the United States of Trump and China.

After the rebound that took place at the end of May, the indices are now more cautious in the face of this new surge in rates and energy. Whether in Europe or the United States, a more hesitant movement of consolidation has been in place for more than a week.

Medium-term inflation expectations in the euro zone and the United States have also picked up. While it had fallen to 2.10% for the euro zone at the end of May, the “5Y5Y” inflation expectation rose to 2.30% at the start of the week. Recovery also for medium-term expectations in the United States to 2.8% against 2.5% at the end of May.

Barring a surprise easing on energy, this context of distrust and tension on rates should remain in place at least until Thursday’s ECB meeting where the markets are awaiting clarification on the intensity and timing of the next rate hikes. rate.

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