Expectations for tighter monetary policy weighed on risk sentiment Friday, even as Amazon attempted a search and rescue mission in the metaverse, where the nascent rebound in US equities was robbed of a quarter-trillion on Thursday. (Dangerous place, that metaverse.)
Christine Lagarde’s hawkish press conference and the first back-to-back BoE rate hikes since 2004 cast a pall. Earlier this week, stocks found solace in measured rhetoric from Fed officials who seem keen to discourage markets from fully pricing a 50bps move at next month’s liftoff meeting. But the tail risk of an early ECB exit is now much closer to being realized. And the BoE nearly delivered a double-hike (i.e., four dissenters wanted a 50bps move).
Most everyday investors don’t trouble themselves with the deliberations of central banks other than the Fed. Invariably, BoE and ECB articles don’t garner much in the way of interest, especially on a day when Facebook erases a quarter-trillion in market value. But make no mistake, what matters more for risk assets in the medium- to long-term is what the benefactors with the printing presses decide about where to set the price of money and how far to tighten the liquidity spigots.
“The cost of borrowing is going to rise more rapidly than was anticipated even a few months ago,” a strategist at State Street said Friday. “Equity investors are also having to think about what that will mean for company earnings.”
In a blog post, ECB Governing Council member Madis Muller said the bank “is ready to adjust its plans for the near future if necessary.” “All indications are that it’s time to move in a clear direction to reduce the central bank’s support for the economic recovery,” he added.
UK 10-year yields rose to the highest since 2018 on Friday. German five-year yields rose above 0% for the first time in years (figure on the left, below). Money markets priced in 50bps of ECB rate hikes in 2022.
JGB yields are now the highest in a half-decade (figure on the right, above).
“No sooner had the ECB’s arch-hawk departed the scene, than Christine Lagarde cast off her dovish bias,” SocGen’s Kit Juckes wrote. “It’s the suddenness of the turn, relative to expectations, which matters for Europe bond and currency markets,” he added.
“Masterful really. And believe me, I have no special place in my heart for policymakers,” Vassilis Karamanis, an FX and rates strategist who writes for Bloomberg, said, in his daily column. “For years, I tried to make a living by betting against them, but I have to admit that in these unprecedented times, they try to steer the ship in the smoothest way possible,” he went on say. “At the same time, they leave ample room for trading opportunities. What more can you ask for?”
Not much in FX, perhaps, but “dumb” equities might simply ask that they keep the party going. Because over the past six weeks, rampant expectations for policy tightening began to sound like that old “You don’t have to go home, but you can’t stay here” refrain.
As for Amazon’s efforts to revive the US equity bounce, it’s worth noting that if the shares managed to log a 14% gain in Friday’s session, that would equate to around $200 billion in market value, enough to (mostly) cover the damage from Facebook’s record-setting meltdown. Such a move would mark the largest one-day gain in market history — a day after the largest one-day loss on record.
Regardless of whether stocks regain their footing, and irrespective of what central banks do or don’t do, investors will remember this week for Meta. As Bloomberg’s Cameron Crise marveled, “the value that’s been removed from Facebook owners has been equivalent to the 30th largest company in the MSCI World index vanishing into thin air.”
