Powell-Lagarde tandem knocks down the market: Watch out for what's next

By Laura Sánchez

Investing.com -- If global markets fell after U.S. Federal Reserve (Fed) chair Jerome Powell's press conference on Wednesday, his counterpart at the European Central Bank (ECB), Christine Lagarde, finished off the stock markets yesterday.

Some falls continue this Friday, judging by today's movements on IBEX 35, CAC 40, and DAX, among others.

What's next? Analysts have made their notes on what aspects to pay attention to now.

"The ECB made it clear that it still has some way to go on tight monetary policy and that rates will remain at their terminal rate for quite some time," said BBVA Research in a report.

"In line with the Fed, the ECB conveyed an idea of higher rates and for longer," Bankinter noted in its daily market commentary.

"The ECB's outline yesterday of its plan to start reducing its balance sheet 'caught many investors off guard', who were given a 'reality check' when they realized that all the major Western central banks have the same scenario: high and lasting inflation, weak economic growth with possible recession in some economies, and rising interest rates, which will remain at high levels for quite some time," said Link Securities in its daily report.

"If we add to this apparent 'surprise' of many investors the fact that bond and stock markets are very overbought after the strong rally they have experienced in the last two months, yesterday's reaction should not surprise anyone," analysts at Link Securities added.

Alberto Valle, director at Accuracy Consulting, pointed out in a commentary sent to Investing.com by email that, "from here, there are 2 key milestones. The first is the [euro zone] December CPI data, to see if a moderation in inflation is confirmed taking into account the same data in December 2021 (which was not good). This data will largely determine the amount of the next hike. The second and more important is the March CPI data (impacted by the start of the Ukraine war)."

"If, because of the base effect, we see a significant drop in CPI, then the ECB will understand that its policies are working (as they seem to be in the US) and may relax the hikes, which does not mean that they will start to lower rates, but rather the beginning of a period of interest rates at levels above 3%," Valle added.

For his part, Konstantin Veit, portfolio manager at PIMCO, highlighted in a commentary sent to Investing.com that "interest rates will remain the main instrument of monetary policy, the tools to safeguard the orderly transmission of monetary policy will be maintained and QT will focus on a gradual and orderly passive reduction of APP reinvestments over time".

(Translated from Spanish)