Fears Of European Economic Slowdown May Have Been A Key Impetus For The Soaring Equity Markets In July

In July, many stock markets posted their best monthly results since November 2020, and in the process defied the generally downbeat predictions of many analysts and economists. Indeed, the S&P 500 Index and the TSX composite index gained 9.1% and 4.4%, respectively. What is especially remarkable about these performances is that very few macro indicators of growth or inflation showed improvement during the month, even though many nations are facing their worst inflationary conditions in 40 years.

Counterintuitively, it appears growing fears that much of Europe faces a potentially sharp economic downturn beginning either later this year or in 2023 may be the key impetus for the July stock market rallies across the globe. More specifically, the economy in Germany, Europe‘s biggest and the fourth largest in the world, registered zero growth in 2Q 2022 after being hit with both the threats and the reality of successively smaller levels of Russian natural gas imports throughout the period.

Source: Eurostat.

In turn, investors sought safety in 10-year German government bunds, cutting its yield more than in half from 1.76% on June 20 to 0.83% on July 29. A similar dynamic has played out in other European countries; the yield on a British 10-year gilt plummeted to 1.87% on July 29 from 2.64% on June 20.

Source: cnbc.com

Remarkably, this is all happening while inflation continues to accelerate not only in Europe but in the U.S. and Canada too. On July 29, the European Union statistics agency announced that inflation in the eurozone’s 19 countries rose to 8.9% in July from 8.6% in June.

Feb-22Mar-22Apr-22May-22Jun-22Jul-22
European Union5.9%7.4%7.4%8.1%8.6%8.9%
United States7.9%8.5%8.3%8.6%9.1%(A)
Canada5.7%6.7%6.8%7.7%8.1%(B)
Headline Annual Inflation Rates Over Selected Twelve Month Periods Ending in Specified Months
(A) To be released August 10, 2022. (B) To be released August 16, 2022.

Given the rapid way in which inefficiencies are exploited in global capital markets, investors bought 10-year U.S. Treasuries with abandon as well, pushing the yield down 80+ basis points to 2.66% on July 29 from 3.48% in mid-June. This extraordinary reduction in required yield has played a key role in the S&P 500’s reclaiming the 4100 level. Based on analysts’ consensus estimates for the next twelve months of about US$239.50 per S&P 500 share, the market now trades at about 17.5x forward earnings.

The issue in all this — and the piece which potentially does not fit into a completely virtuous puzzle — is these low U.S. and European bond yields apparently presume that inflationary pressures will ebb soon from historically very high levels, even though central banks have so far raised overnight night rates to only fairly modest levels. 

The Federal Reserve’s benchmark overnight borrowing rate is 2.25%-2.50%, and the Bank of Canada’s is just 2.25%. Furthermore, the European Central Bank’s deposit interest rate is 0%, and the Bank of England’s main Bank Rate is set to only 1.25%. It does not seem likely that that such modest overnight interest rate levels can bring 8%-9% inflation rates to much lower levels as rapidly as equity markets are currently pricing in.


Information for this briefing was found via Edgar, Bloomberg, and the companies mentioned. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.

Video Articles

Mergers Set the Stage for Uranium’s Growth Cycle | Forum-Baselode Merger

The Goal is Gold Production as Soon as Possible! | Gordon Robb – ESGOLD Corp.

Snowline Gold: The Multi Billion Dollar Valley PEA

Recommended

First Majestic Produces 7.9 Silver Equivalent Ounces In Q2, Lifts Production Guidance

Antimony Resources Drills 4.17% Antimony Over 7.4 Metres At Bald Hill

Related News

Analysis: The Stuck Supply Chain

Earnings season is upon us and, as analysts stare down previous quarters of growth numbers...

Monday, October 18, 2021, 03:30:00 PM

America’s Inflation Problem: June CPI Hits Yet Another Record As Real Wages Continue to Plummet

Just when you thought you were under the impression that things might, just might, be...

Wednesday, July 13, 2022, 10:14:00 AM

Bank of America: Stock Rebound is Only a ‘Textbook’ Bear Market Rally, Further Declines Likely to Come

Although stocks have strongly rebounded from the lows witnessed earlier this summer as investors became...

Friday, August 26, 2022, 01:24:00 PM

Kimberly-Clark Forecasts Price Increases as Inflationary Pressures Accelerate, Supply Chain Disruptions Worsen

In yet another sign that inflation pressures are proving to be a lot more than...

Tuesday, October 26, 2021, 04:48:00 PM

Jerome Powell Hikes Rates 75 Basis Points, Doesn’t Believe Economy Is In A Recession

The Federal Reserve on Wednesday delivered on a much-anticipated 75 basis-point rate hike, whilst acknowledging...

Wednesday, July 27, 2022, 04:58:00 PM