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LGT Navigator: Investors remain cautious ahead of US rate decision

July 27, 2022

Financial markets focus on the interest rate decision of the Federal Reserve today. The deepening energy crisis in Europe is weighing on the euro, which has fallen to a record low against the Swiss franc. Meanwhile, the IMF has lowered its global growth forecasts.

Fed

Investors are turning their attention to Washington today, where the Federal Reserve (Fed) will inform about the further monetary policy. Markets expect the Fed to raise key interest rates by +75 basis points for the second time in a row. What is likely to be more interesting, however, is what happens after this meeting. While it is likely that the Fed will hike rates also in the second half of the year, it is questionable whether the monetary authorities will be able to maintain the current pace. Analysts therefore expect Fed Chairman Jerome Powell to increase the leeway regarding the size of future interest rate steps. This would allow the Fed to react more flexibly to the uncertain growth outlook and inflation trends.

US stock markets have come under pressure one day before the interest rate decision. The S&P 500 fell on Tuesday -1.2% and the Dow Jones lost -0.7%. The Nasdaq Composite slid -1.9%. Disappointing quarterly earnings weighed on sentiment. Thus, the retailer Walmart cut its quarterly and full-year profit estimates because of rising food prices. The stock plunged -7.6% and dragged other retailers with it.

Asian stock exchanges show a mixed picture on Wednesday. In Tokyo, the Nikkei gains +0.4%. In Hong Kong, the Hang Seng sheds -1.4% and the Shanghai Composite loses -0.1%.

Euro falls to record low

The euro briefly fell to a new record low against the Swiss franc on Tuesday. The common currency fell to CHF 0.9754, after trading above CHF 0.98 in the morning. Similarly, the euro depreciated significantly against the US dollar and cost USD 1.0116 at its daily low. The euro's weakness is driven by the worsening of the energy crisis in Europe, which could trigger a recession. The Russian state-owned company Gazprom announced on Monday that it would again reduce natural gas deliveries through the Nord Stream 1 pipeline from Wednesday. Accordingly, only 20% of the maximum possible capacity will be delivered to Germany. The price of natural gas rose accordingly on Tuesday, having already significantly increased the previous day. The price for a megawatt hour for delivery in August climbed to over EUR 200, which is about 13% higher than on Monday. 

Gas shortage impacts German export prospects

The impending shortage in gas supplies is also impacting the outlook for German exports as a survey conducted by the Munich-based Ifo Institute shows, which polled around 2300 industrial companies. According to the survey, export expectations in July fell by -3.9 points to -0.5 points compared to the previous month, as the research institute announced on Tuesday. The chemical sector is particularly pessimistic about the future, as the industry relies heavily on the use of natural gas. Printing companies, rubber and plastic goods manufacturers and furniture makers also expect exports to decline. By contrast, manufacturers of data processing equipment are confident, and the automotive sector and mechanical engineers anticipate a moderate increase in exports.

IMF lowers growth forecast

The International Monetary Fund (IMF) has again reduced its global growth forecasts. The war between Russia and Ukraine and high inflation are weighing on the global economy, the IMF said on Tuesday. The economists expect global growth of +3.2% this year, down from +3.6% in April. For the eurozone, the IMF forecasts an expansion of +2.6% (April: +2.8%). Inflation also remains stubbornly high, the forecast says. The IMF expects inflation in the industrialized countries to reach +6.6% in 2022 (April: +5.7%).

 

Economic Indicators July 27

MEZ Country Indicator Last period
08:00 GER GfK Consumer confidence (Aug, m/m) -27.4
16:00 US Pending home slaes (June, m/m) +0.7%
20:00 US Federal Reserve interes rate decision

 

Earnings Calender July 27

Country Company Period
GER BASF Q2
US Boeing Q2
US Bristol-Myers Squibb Q2
CH Credit Suisse Q2
FR Danone Q2
GER Deutsche Bank Q2
CH Holcim Q2
FR Kering Q2
US Meta Platforms Q2
ITA UniCredit Q2
FR Worldline Q2

 

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Imprint
Publisher: LGT Bank (Switzerland) Ltd., Glärnischstrasse 36, CH-8027 Zurich
Editor: Alessandro Fezzi, E-Mail: lgt.navigator@lgt.com
Source: LGT Bank (Switzerland) Ltd.

 

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