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European banks fall; 'Not your typical rate cutting cycle,' warns BlackRock

Published 06/04/2024, 08:20 AM
© Reuters.

Investing.com - All European banks are in turmoil this Tuesday, with stock prices in the red led by Banco de Sabadell (OTC:BNDSY), Caixabank (OTC:CAIXY), and BBVA (BME:BBVA). The market is jittery ahead of the European Central Bank (ECB) interest rate decision this Thursday.

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In their latest market report, BlackRock (NYSE:BLK) analysts warn: This is “not your typical rate cutting cycle.”

"We see inflation limiting how much central banks can cut interest rates. We like U.S. stocks over Europe’s as they benefit from the artificial intelligence theme.," the asset manager states.

"Markets remain sensitive to Federal Reserve policy signals and its rate path, helping lift the VIX index of implied S&P volatility from four-year lows last week," they add.

"Markets will be parsing signals for future rate cuts by the European Central Bank (ECB) and updated macro forecasts at the policy meeting this week. Major central banks are gearing up to cut interest rates. But like their hiking cycles, this cutting cycle will be far from typical, we think. Why? The ECB is set to start easing before the Fed, but a wider policy gap between them will be temporary, in our view, even if a Fed hike is not impossible," BlackRock warns.

"Central banks are eyeing rate cuts with inflation still above 2% and growth strong or improving. We see them keeping rates high for longer. We prefer U.S. stocks over Europe because of the AI theme," they note.

Beyond June

European government bond yields have swung as markets question how far the ECB will ease policy beyond a first cut expected this week. Falling inflation and 18 months of weak economic activity make the case for the ECB to start cutting rates," BlackRock explains.

"But we don’t think it will cut far and fast. Likewise in the U.S., we see just one or two Fed cuts this year. This is not your typical rate cutting cycle. Central banks are set to keep rates above pre-pandemic levels (see the dots in the chart) due to persistent inflationary pressures – and last week’s euro area inflation data again showed stalling inflation progress," the experts add.

" Unusually, the ECB is readying to cut when growth is improving, inflation is above its 2% target and the unemployment rate is at a record low. That’s a far cry from the economic crisis and low inflation in the past decade that spurred the ECB to introduce negative interest rates and buy bonds at scale," they warn.

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