Was for a trading week! The euro hit a new 20-year low on Friday and 10-year Bund yields tested the 2 percent mark for the first time in nine years. The euro fell to $0.97, while the 10-year Bund yield settled at around 1.95 percent after rising to 2.01 percent at the start of trading.
The German stock index Dax temporarily fell to its lowest level since November 2020 and only reached 12,206 points in the afternoon. Many commodity prices also fell: the price of copper, for example, nicknamed “Dr. Copper” and considered an indicator of the health of the global economy, fell another 2.3 percent to $7,503 per tonne. Gold fell nearly 2 percent to $88.83 a barrel, dropping to its lowest level since April 2020. At times, an ounce (31.1 grams) cost as little as $1,641.
Interest rate hikes scare off investors
What’s happening there? “The fact that at least Europe is entering a recession phase is now questioned by very few,” said Weberbank analyst Jens Herdack. The rate hikes are apparently scaring off many investors, and there are now signs of a downturn that can hardly be overlooked. No fewer than 13 central banks around the world decided their interest rate policy this week, with many opting for a rather aggressive course of rate hikes. Last but not least, the US central bank, the Fed, has announced that it will raise interest rates further next year.
Economic pessimists recently saw themselves confirmed by the German purchasing managers’ indices, according to which the German economy contracted surprisingly sharply in September. More than a year and a half ago, activity in the euro area was just as bad as last year. “Clearly, the majority on the floor don’t believe the ECB can keep up with the rapid tightening pace of the US central bank, the Fed,” said portfolio manager Thomas Altmann of investment advisor QC Partners on the euro’s losses. Another stressor is the upcoming parliamentary elections in Italy. The right-wing electoral alliance, which tops the polls, is less EU-friendly than previous governments. Investors should therefore be prepared for price fluctuations, especially in the case of Italian government bonds.
Inflation likely in double digits
Inflation figures for Germany and the euro area will be published next week. And in any case, Jörg Krämer, the chief economist at Commerzbank, expects inflation in Germany to hit double digits as early as September – and only very slightly below that in the euro area. It should also be 10 percent there, according to Krämer. According to surveys, more and more citizens distrusted the ECB and also expected long-term inflation to be well above the promised 2 percent. “The ECB is starting to respond to these alarm signals,” said the economist. The financial markets have sharply raised their key interest rate expectations and now expect an ECB rate of 3 percent for the middle of next year: “That is the main reason why Bund yields have risen so strongly recently.”
The euro, on the other hand, is depreciating against the dollar for two reasons, Krämer said. “First of all, the US central bank is likely to act even more strongly against high inflation than the ECB,” says the economist: “In addition, the economic risks in the euro area are greater – because here in Germany, unlike in the United States, there is a risk of an energy crisis.”