Financial Markets Daily Report

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Risk appetite extended across markets on Tuesday, as investors weighted cheaper valuations against fears of a sharp slowdown in the global economy and a more aggressive withdrawal of monetary policy stimuli by central banks.

Investors started the week trading cautiously optimistic, in a session characterized by low volumes due to a holiday in the US and no major macro data releases.

Markets ended the week with a relief rally, recovering only a fraction of the decline in previous sessions, after a week dominated by monetary policy decisions by major central banks and fears among investors of an economic recession.

Monetary policy and recession fears centered, again, the stage in financial markets. While investors focused on risks of an upcoming recession in the US, central banks continued tightening their monetary policy stance.

In yesterday's session, central banks gave some fresh air to financial markets, fueling a relief rally across the board, with yields on sovereign bonds declining sharply in both sides of the Atlantic. 

During a volatile session, investors continued to trade with a cautious mode, taking position ahead of the crucial Federal Reserve meeting today. Implied forwards suggest a 75 bp interest hike is expected to be announced today.

Financial markets started the week with another sell-off session in which traders increased their demand for safe-haven assets. The higher-than-expected US inflation reading is still weighing on sentiment and investors raised their bets for a 75bp interest rate hike from the US Federal Reserve this Wednesday.

The upside surprise in the US CPI figure for May led to a sell-off session on Friday as investors reinforced their bets for additional 50bp interest rate hikes from the Federal Reserve beyond the June and July meetings. Headline inflation accelerated to 8.6% y/y while core inflation ticked down to 6.0%.

Financial markets extended losses on Thursday, following the confirmation by the ECB to accelerate the withdrawal of  policy accommodation, including ending net purchases on July 1st and starting a rate liftoff cycle on the 21st.

Investors traded cautiously on Wednesday, amid persisting worries about high inflation and slowing economic growth, and ahead of the crucial ECB meeting today. We expect the ECB to confirm the end of net asset purchases in early July and to signal the start of a hiking cycle in the policy rates thereafter.

During a volatile session, financial markets closed the day with no clear direction, with investors taking position ahead of the crucial ECB meeting on Thursday and the release of the US CPI inflation on Friday.

Investors started the week with a risk-on mood, with sentiment supported by easing COVID restrictions in China, including reports that Chinese regulators are relaxing some rules against some tech giants. Data also showed the decline in the Chinese services sector eased in May (the services PMI rose from 36.2 to 41.4).