Financial Markets Daily Report

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The US Federal Reserve’s meeting centered the stage in a risk-off session, also spurred by the escalation of Russia’s offensive in Ukraine. As expected, the central bank raised policy interest rates by 75 bp while President Jerome Powell said that interest rates will need to stay in restrictive territory for longer, as shown in the dot plot.

Yesterday financial markets recorded a highly volatile session after Russia announced a plan to hold a referendum in the occupied regions in Ukraine this weekend. Investors also dialed up their expectations of tighter monetary policy from central banks, after the Swedish Riksbank surprised with a 100bp hike.

In yesterday’s session, investors traded cautiously as they continued to assess the intensity and duration of the monetary policy tightening that central banks are likely to agree this week and in the coming months.

Investors ended the week trading with a pessimistic tone amid concerns on the economic outlook and tightening monetary policy. On a positive note, the US consumers' inflation expectations survey (University of Michigan) showed the lowest rate since last September, easing concerns that the Fed could hike rates this week by 100bp.

Risk aversion continued to set the tone on Thursday, with sentiment hampered by fears that elevated inflation could keep central banks in a tightening cycle for longer and the increasing threat of energy rationing in Europe this winter.

Investors continued to trade with a cautious approach, still digesting the upside surprise in the US inflation data and taking on board a plan by the EU to intervene energy markets.

Risk aversion returned to the fore on Tuesday after CPI inflation surprised to the upside in the US, fueling a new upward revision in investors’ expectations about the pace of monetary policy tightening by the Federal Reserve.

Investors started the week trading with appetite for risk, taking position ahead of the CPI inflation report for August in the US, to be released today. According to the Consensus, CPI inflation is expected to have eased to 8.1% y/y (from 8.5%), which, if confirmed, could reduce some pressure on the Fed for continuing hiking policy rates aggressively.

Investors closed the week trading with a risk-on mode, recovering some of the losses of previous sessions following the hawkish rhetoric by major central banks, including the 75 bp interest rate hike by the ECB and comments by Fed Chairman Jerome Powell, who reiterated the need to act forthrightly on inflation “until the job is done”.

Investors focused yesterday on the ECB Governing Council meeting, where interest rates were raised by 75bp, and US Federal Reserve hawkish comments. Both central banks showed determination to tackle elevated inflation and to bring it back to their 2% target.

In yesterday’s session investors traded cautiously as they continued to assess the global economic global outlook, amid worse-than-expected exports data in China, and as they positioned for today’s ECB Governing Council meeting.

Investors continued to trade with caution in anticipation of further monetary tightening by the Fed, despite ISM service sector survey in August was consistent with very solid growth in Q3. In the euro zone, the surveys anticipate the ECB will hike interest rates by, at least, 50 bp on Thursday.