Rising interest rates and China cast a shadow over the outcome of the presidential election

Emmanuel Macron’s victory in the presidential election was not praised by the stock market, in Paris or anywhere else. And so all European markets opened in the red on Monday, with the CAC 40 dropping sharply by 2% in the middle of the session, towards 6,400 points, reducing the decline in the middle of the afternoon by about -1, 40%. It is true that the election results were widely expected by the markets and incorporated into the prices. The stock exchange never took into account the majority hypothesis of Marine Le Pen at the end of the poll.

Markets are still reeling from rising interest rates and the threat to the health situation in China that caused Asian markets to fall at the close on Monday. Almost all of the economic capital Shanghai has remained closed for three weeks, once again disrupting supply chains. In the opinion of many analysts, the Chinese government’s “zero COVID” policy, which remains in place and points to this path, could finally Chinese growth has been jeopardized, and thus global growth.

But in fact, concerns in the area of ​​interest rates remain the most acute. What surprises the markets is not the rise itself, which can be justified by the strength of the recovery in recent months, but its accelerating pace.

Select the “hawk” ringtone

US 10-year rates, which give The In the markets, it has risen 130 basis points since January and is now touching the 3% token minimum. Even more surprisingly, European rates have followed roughly the same pace, while growth and inflation are at lower levels than across the Atlantic, and the European Central Bank (ECB), unlike the Federal Reserve, has not yet begun to raise key rates.

The German 10-year rate, the benchmark for a risk-free asset in the eurozone, is close to 0.9%, or more than 107 basis points since January, and the French 10-year rate (OAT) is 1.35% (having passed 1.4%) Today compared to 0.2% at the beginning of the year. That’s multiplying by 7 in four months! This rapid rise in European rates also bodes quietly. Unfortunately, Christine Lagarde, president of the European Central Bank, dashed those hopes last week by invoking them for the first time. “High probability” Key interest rates will rise before the end of the year.

But it was Federal Reserve Chairman Jerome Powell who launched the accusation last week, deeming it “appropriate” to raise key interest rates by 50 basis points next May, the fastest rate raising cycle in decades. In short, it is the “hawks” (the priority in the fight against inflation) who are setting the tone now compared to the “doves” (the priority for growth).

Pressure on stock growth

A price hike isn’t necessarily bad news for the stock market, provided companies retain the ability to maintain their earnings growth rate. This is why investors prefer stocks that have pricing power, those that can move the prices of their goods and services to an increased cost of inputs, raw materials and wages.

On the other hand, there is a mechanical pressure on growth stocks, which are generally valued by discounting future cash flows. However, the higher the interest rate, the lower the discounted amount. But this rule does not apply to developing stocks that have managed to maintain their competitive advantage, such as Netflix. However, the Nasdaq, the benchmark for developing stocks, is down 9% in one month and 18% since the start of the year.

On the other hand, sector turnover in favor of “value” stocks can be a factor in supporting markets, especially in periods of high inflation. Certain sectors, such as commodities, listed real estate, banking and insurance, or defensive stocks, such as telecommunications, can benefit.

Another threat to stocks: higher interest rates make fixed-income assets more attractive, especially risk-free sovereign debt, which is now in largely positive territory, and managers can arbitrate in favor of debt rather than equity. But that rotation doesn’t seem to be clearly underway, even if equity funds are timidly starting to trickle in after last year’s massive inflows.