Inflation Concerns Prompt ECB to End Era of Negative Rates
The European Central Bank raised its policy rates by 50 basis points, including its deposit rate, which is now 0%, to address high inflation levels in the bloc.
Authored by: Thomas O'Mahony
Fed Tightens by 0.75% and Projects Softer Economy
The Federal Reserve announced that it was raising the target range for the Fed funds rate by 75 basis points to 1.50%–1.75% and made wholesale changes to its summary of economic projections.
War in Ukraine Dents European Growth Prospects
The ongoing war in Ukraine has exerted a material impact on both global economies and markets, primarily via a steep increase in commodity prices, especially energy. Europe has been particularly affected due to its geographical proximity and the resultant dependence of many of its nations on Russian fossil fuels. This chart book reviews the hit to European growth associated with the war in Ukraine.
Do Significant Geopolitical Events Tend to Precede Equity Bear Markets?
Global equities tend to sell off following major geopolitical events, but such declines have historically been mild and short-lived, far below the 20% drawdown threshold that is typically considered a bear market.
Review of Market Performance: Calendar Year 2021
The global economy continued its road to recovery in 2021, as the most severe economic impacts of the COVID-19 pandemic gradually receded. There were fresh waves of infection during the year, but the public health actions taken to counter them were less economically damaging. In the meantime, fiscal and monetary policy remained at extremely accommodative levels, supporting strong risk-asset performance.
Is the Speculative Stock Downturn a Precursor to a Broader Bear Market?
Even as broad equity indexes remain close to their all-time highs, the proportion of stocks in their own ‘bear market’ has recently increased, particularly among speculative growth stocks.
Inflation Pressures Central Banks to Begin Normalizing Policies
This week, the Federal Reserve, the Bank of England, and to a lesser extent the European Central Bank all acted to tighten monetary policies. These tightenings came as inflationary pressures have surged in many countries and as other central banks have looked to rein in simulative policies. But, when combined with above-trend growth expectations next year and central banks’ likely cautious tightening approach, we suspect financial conditions will likely remain accommodative and supportive of risk assets.
Does the New German Government Herald a Return to Fiscal Austerity for Europe?
No. While there is no danger of the fiscal floodgates opening in Europe, the ‘traffic-light’ coalition of the Social Democratic Party (SPD), the Greens, and the Free Democratic Party (FDP) looks set to oversee some loosening of the fiscal purse strings in Germany.
The Dollar Finds Temporary Support
The US dollar tends to appreciate during two broad economic regimes. One is when the US economy is materially outperforming its global counterparts, attracting capital looking to benefit from the superior US prospects. The other is when growth slows sharply, attracting safe-haven-seeking capital. This is the “dollar smile” model of the currency, and looking at 2022 through this lens suggests some dollar strength may be in store.
Does the ECB Strategy Review Represent an Overhaul of Euro Area Monetary Policy?
No. The results of the strategy review were more about clarifying and making explicit how European Central Bank (ECB) policy is currently run, rather than signalling a radical departure for monetary policy in the single currency bloc.