The winter of European discontent has passed

European Central Bank has raised the rates - again
Energy crisis in Europe recedes, economy resilient
Strong numbers from the US jobs market, although times ahead could be rough

After starting the year at an especially optimistic tone in January, financial markets have retreated a bit during February, digesting the conflicting views on the resilient economy, slowing inflation and still predominantly hawkish central bank stance around the world. The developed countries‘ stock market index MSCI World has decreased slightly by 2.5%, whereas the emerging markets stocks‘ gauge MSCI Emerging Markets has feared worse by hitting the negative 6.5% returns levels in February.

ECB hikes again

In the beginning of February, the European Central Bank (ECB) decided to raise the key rate by 0.50% to 2.5%, thus extending the extraordinary set of interest rate increases started last year. Despite the record pace of the hike cycle so far, the Governing Council of the ECB said in a statement that it „intends“ to raise the rates by yet another 0,50% in its next meeting in March before evaluating next steps in the monetary policy. Christine Lagarde, the President of the ECB, has reiterated the usual strict position on the further hikes by assuring the market that “our determination to reach 2% medium-term inflation
should not be doubted”.

Energy crisis in Europe recedes

Energy prices in Europe definitely contribute to the ECB ambition of slower inflation, as they have been receding in the recent past. Perhaps most strikingly, natural gas prices in Europe have continued trending down to reach the lowest levels since late 2021 and dropping more than three times since the 2022 August peak. While the risk of price spikes remains, the unusually warm winter season, the unprecedented pace in implementing new liquid natural gas (LNG) import capacity and restrained natural gas demand have all certainly contributed to calming the energy markets.

Natural gas prices in Europe, USD/mmbtu

Source: Bloomberg L.P.

Signs of European recovery

As if to underline the recovering mood in the European economy, S&P Global’s Eurozone Composite purchasing managers’ index (PMI), which measures the level of activity in manufacturing and services, increased to 52.3 in February (from 50.3 in January) and exceeded the forecasted level of 50.6. The reading essentially tells that the business activity in the bloc has been expanding (readings above 50) for the second month in a row, thanks to resilient services’ activity and recovering manufacturing activity.

US economy in crossroads

In the meantime, the US economy has been showing conflicting signs over the recent month. Market participants have been surprised by the US economy adding extremely strong 517 000 number of jobs in January versus 187 000 expected (and versus the previous reading of 260 000). The news have sure contributed to the renewed hopes of “soft-landing” in the economy – mild slow down, only, in the economic activity amid slowing inflation. On the other hand, investors’ optimism was daunted by the retail behemoths’ – Walmart (supermarkets) and Home Depot (home improvement retail) – shared concerns of tougher times ahead as consumers are expected be more frugal in 2023.

“House view” update

Thanks to the conflicting views in the world economy, we decided to retain the neutral risk allocation budget. As the indicators show improving market sentiment and economic activity, we have been reducing our positioning towards the defensive industries, while not entering the more growth-oriented industries’ positioning, for now.

Luminor House View

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