Financial Markets Daily Report

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Risk aversion continued to set the tone across financial markets on Tuesday as investors took position ahead of the Federal Reserve’s policy meeting today, with money markets pricing another 75 bp hike in the policy rate.

Investors started the week trading cautiously, taking on board weak sentiment data, hawkish commentary by some ECB officials and news reporting that Russia is due to reduce gas supplies to Europe.

In the last session of the week, investors' recession fears increased following the worse-than-expected economic sentiment data. In particular, July's Composite PMIs for the euro area and the US fell below the 50 points threshold, with decreases in both the services and manufacturing indices.

In yesterday’s session, the ECB announcements centered the stage, with a 50bp hike that pushed interest rates off the negative territory and the unveiling of the Transmission Protection Instrument (TPI).

Italian politics and European natural gas developments centered the stage in yesterday’s session. On the one hand, Draghi’s coalition government failed to pass the confidence vote, increasing the odds of snap elections this autumn.

Investors' sentiment continued to improve yesterday following reports that Russia is willing to restart natural gas exports tomorrow, after the maintenance break. On monetary policy, a report suggesting that the ECB might consider a 50bp hike on Thursday pushed interest rates higher in the euro area.

In the first session of the week, investors' sentiment improved slightly and preference for riskier assets increased.

In the last session of the week, investors' sentiment improved as the odds for a 100bp hike in the next US Federal Reserve meeting decreased.

In yesterday's session, investors traded with a risk-off mood following the downward revision of the European Commission forecasts. While 2022 GDP for the euro are was barely revised to 2.6%, 2023's changed from 2.3% to 1.4%. The EC revised its inflation forecasts from 6.1% and 2.7% to 7.6% and 4.0% for 2022 and 2023, respectively.

A shocking inflation release in the US centered the stage yesterday in financial markets. Headline CPI rose in June by 9.1% y/y and 1.3 m/m, reinforcing the Federal Reserve intention to raise rates by 75bp again at its July meeting. Additionally, investors have started to price in a 100bp hike, in line with yesterday's decision of the Bank of Canada.

In yesterday’s session, investors’ concerns of a decelerating economy spiked after worse-than-expected sentiment data in Germany and the euro area and comments from Richmond Federal Reserve President Thomas Barkin.

In the first session of the week, investors searched for catalysts as they positioned ahead of a key CPI data in the US on Wednesday and the start of the earnings season.