The CAC 40 finally rebounds, after a 10% drop in a straight line and in less than 8 days. The stabilization of the markets is explained by the confirmation of the recovery of activity in China (after a collapse in April) and “the ECB’s commitment to act against the widening of sovereign spreads (interest rate difference between bonds of State of the euro zone and that of Germany, reference of the Old Continent) if it became systemic (without however announcing when or how it could do it)”, notes La Banque Postale Asset Management (LBPAM).
But after the steep price falls of the past few days, stocks and bonds are “down sharply in the quarter, for the second quarter in a row, which has only happened once since the 1980s, when the financial crisis of 2008,” recalls the asset manager. With long-term interest rates hovering at their highest levels in many years, equity markets “have officially entered into bear market (bear market) for the first time since the start of the Covid in the United States and in the euro zone”, he underlines.
And credit risk premia (the pay gap) on weak Eurozone government bonds are approaching their early Covid highs.
What should be done with his actions?
Faced with a more disturbed context, Pictet Asset Management says it has taken an “underweight” position on equities, at the global level. “Inflation persists and the major central banks will have to tighten their monetary policy, even as economies slow down,” explains Frédéric Rollin, investment strategy advisor at the Geneva management company. Moreover, in view of the increase in the cost of raw materials and wage inflation, the growth in profits of listed companies could “prove to be disappointing”, warns the expert.
Pictet Asset Management says it prefers European equities to American stocks, the latter proving to be “more expensive, whether compared to other equity markets on the planet or to American bonds”.
And the surge in long-term rates weighs more on Wall Street than on European equities, the rating in the United States comprising a greater share of growth stocks, those which suffer the most from the phenomenon of soaring remuneration of government bonds.
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Author’s declaration of interests