On a key day for the markets awaiting definitions from the Fed, a BlackRock markets report warned investors about “cracks” in the financial system as a result of raising rates to curb inflation.
“The banking problems on both sides of the Atlantic that have rocked the markets in the past week are the latest consequences of the fastest rate hikes since the early 1980s,” the company report said bluntly.
“The reason: the hope that central banks will come to the rescue and cut rates, as they have done in the past. That’s the old manual, and it doesn’t work anymore. Central banks have to continue to fight stubbornly high inflation and have to use other tools to safeguard financial stability.highlights the manager.
“An example: The European Central Bank raised rates by 0.5% last week. And we expect the Federal Reserve to raise rates this week. Our conclusion: Investors need a new investment manual and stay agile in this new market regime, ”they say in BlackRock.
As these analysts explain, “the banking tensions that are rocking markets are very different, but what they have in common is that markets are now examining the vulnerabilities of banks through the lens of high interest rates. that markets are now looking at banking vulnerabilities through the lens of high interest rates.” However, they say: “We do not see a repeat of the global financial crisis of 2008.”
These experts comment that some of the problems that have arisen recently have been known for a long time, and banking regulations are now much stricter. now. Instead, it is a recession foretold. “Because? The only way central banks could reduce inflation was to raise rates high enough to cause economic damage. It is likely that the latest financial cracks will restrict credit, take a toll on confidence and, ultimately, hurt growth.
Implications for investors
At BlackRock, 3 key factors stand out:
1. BlackRock weights equities and ensures risky assets are not in recession.
2. At the same time, they ensure that the best option for investors is short-term public debt. “We believe that major central banks will distinguish their fights against inflation from any measures taken to prop up the banking system. The ECB did so last week by raising rates as originally announced, even as markets were beginning to doubt its resolve We expect the Fed to take a similar approach when it raises rates this week US CPI last week confirmed that core inflation is not on track to fall to the Fed’s target so we could see a reversal of the strong recent drop in two-year interest rates and other short-term interest rates.”
3. They highlight emerging market assets. “Under the radar it has been confirmed that the economic restart in Asia from the Covid restrictions is powerful. In addition, China’s monetary policy is favorable, since the country has low inflation compared to DM. In our opinion , this should benefit emerging market assets.”
Source: Ambito
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