How would the market perform without liquidity support from central banks?

May 4, 2022

Redacción Mapfre

Redacción Mapfre

Widespread stock market dips in the fourth month of the year have broken the historical trend for that month (the average market return was close to 2%). April, a once-complacent month for investors, has witnessed the Nasdaq record a fall of more than 13% (the worst month since the 2008 crisis), driven mainly by the FAAMNG (the six top-performing companies in the technology sector). The red panels were also seen on Wall Street, where uncertainty has been rife: the S&P 500 recorded its worst monthly performance since the outbreak of the pandemic, falling by more than 9%.

Despite everything, the United States appears to be closer to dollar/euro parity, as the relative value of the euro has lost 5% against the US dollar in the last month. According to Alberto Matellán, chief economist at MAPFRE Inversión, this is because “US monetary policy is ahead of European policy, and they are already restricting the amount of dollars in the market; moreover, growth is falling faster in the eurozone.” However, in his view, this strengthening of the dollar is not an indication that the euro is depreciating.

This gradual withdrawal of Fed liquidity (coupled with interest rate hikes) that our expert hints at is all set to roll: Jerome Powell has followed the expected roadmap of the American central bank and has stated that from June 1, it will begin reducing asset holdings on its 9 trillion-dollar balance sheet. The Fed has also announced a 50-point rise in interest rates (the highest rise in 22 years, when Alan Greenspan headed up the bank), something that "the market would have already discounted, not ruling out even 75 points." The market is assuming that rates will continue to rise in the coming months to curb inflation, although Alberto Matellán was clear that investors should pay attention to the liquidity levels set by the Federal Reserve from now on.

The consensus of analysts assumes that sooner or later the ECB will take the same steps as its American counterpart. According to Daniel Sancho, head of investments at MAPFRE Gestión Patrimonial, “the gradual withdrawal of liquidity and the anticipated rise in interest rates may generate risk and affect equities to some degree. But this is both healthy and necessary. We need to take a step back and recognize the new monetary landscape.” After years of accommodative policies, the key will be to see “how the market performs without liquidity support,” reckons the expert at MGP. Nevertheless, while this context may generate volatility, Daniel Sancho believes that “opportunities may present themselves.”

The new package of measures against Russia benefits no one

Geopolitical tension in Europe is not isolated from the policies of governments and central banks. The famous saying “buy the rumor, sell the news” is, once again, beginning to ring true: the price of oil (a terribly volatile variable at present) is expected to resume its new upward trend after the announcement of a possible package of measures on Russian crude oil. In fact, the latest Economic and Sector Outlook, drafted by MAPFRE Economics, already forecast oil above 100 dollars until 2023.

However, the adoption of new sanctions is also bad for those who implement them: “While it remains to be seen whether or not they make sense in the long term, it is clear that they will affect activity in the eurozone,” warns Alberto Matellán, who also points out that the problem could ultimately touch “citizens, investors, and analysts.”

In addition to the negative news coming from the indexes, the risk of energy prices having a further impact on runaway inflation and, in turn, the purchasing power of citizens should not be a matter of concern for investors when putting together their portfolios. “Nearly all asset classes lost during April, but this was due to market circumstances. We should not become fixated on a particular month or on the day to day, as this generates unwanted swings in sentiment,” affirms the economist at MAPFRE Inversión.

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