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Status Report
of the economy.14 September 2022

Experts point out that the stock markets finally broke the three-week line of falls, at a point where half of the summer rally had practically been eroded. Inflation fears may have moderated, thanks in part to the drop in oil prices in the middle of last week (lowest levels since the invasion of Ukraine). The aggregate world stock market index recovered +2.7%, the US recovered on average +3.7% and Europe +0.8%. 

 

 

For financial analysts, without a doubt, the most important thing this week has been the ECB's decision to increase basic interest rates by 0.75%, a record figure, in an attempt to curb inflation. The deposit rate now stands at 0.75%, while the refinancing rate stands at 1.25%, its highest levels since 2011. For Lagarde it is important to move forward with the _cc781905-5cde-3194-bb3b -136bad5cf58d_transition from the current highly accommodative level of official interest rates to levels that guarantee a return to inflation with a medium 2% target. With this, it has already been announced that further rate hikes are likely. Your inflation expectations will be the basis for decision-making and for the time being, they remain very high.

 

 

Experts show the evidence that Europe is going through a complicated period and that States must seek solutions to help families from now on. In Germany, Chancellor Scholz said that the government will spend 65 billion euros to protect households and businesses, with a tax on electricity companies. Separately, Finland, Sweden, Switzerland and the UK have pledged emergency liquidity support for electricity generators facing a potential liquidity crisis as collateral is required to cover future production soaring. The debate between the energy ministers will focus on intervention in the electricity market, with price caps, possible limits on the price of Russian gas imports, extraordinary taxes or efforts to improve energy efficiency.

 

At this point, experts expected  inflation to remain high in the first half of the year and then begin a process of normalization and gradual decline in the second half of the year, as the necks of supply bottle relaxed and consumption rotated from goods to services, with an impact on material prices. The reality is another; prices have been higher for longer, with energy as the main reason, and the process of adjustment and cycle transition is taking longer than expected.

 

The so-called base effect (comparing the current year with the past, which was already high) or the relaxation in supply restrictions, have not added up. Both energy and materials (with that derived from the Ukraine in between), have meant that prices have remained high for longer in the first half of the year. On a positive note, both general and basic prices (which exclude food and energy) have begun to trend downward. It is still  thinking that price moderation will come, but the stabilization period is longer than thought.

 

 

 

CONCLUSIONS OF EXPERTS IN ECONOMICS

 

Inflation and interest rates are the key to the behavior of the market this year.  The styles and sectors most linked to high growth and technology have been the most affected, due to an economic environment of slower growth and greater sensitivity to the rise in interest rates. Thus, the speculative sectors of the market have been the most affected, while value investments and high-quality companies that pay dividends have resisted better. After falling more than 20% this year, equities have made a reasonable rebound, rising more than 15% from mid-June to mid-August. It is a positive fact, but it is not a clear symptom of a change of course.

 

Experts believe that the minimum levels in June put a price on the recession scenario that has been taking place ahead of time, as well as a certain pessimism regarding the economic and earnings outlook. And although that means a greater fragility of the economy and from this point it does not have to cause another section of strong correction to the downside, we do not believe that we have seen the end of the volatility in stock markets or interest rates. They also state that we are in the midst of a "bottoming out" process for the markets, navigating a U-shaped recovery, rather than a V-shaped rebound, as seen after the Covid effect; in this case, the tools that powered it are not present. 

 

Asked what is needed for a solid and lasting market recovery, experts respond:

 

  1. Several months of declining inflation: Although the countdown is activated, it will take a few months. The next report on US inflation (this week), represents a fundamental note of this element.

  2. Resilience in the Economy and Earnings: The economy is holding up reasonably well, although we think downward revisions to corporate earnings could be a catalyst for further market swings.

  3. A readjustment of valuations: In our view, valuations have come down significantly as markets have priced in a large bearish scenario.


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