Aug 18, 2022 07:12AM ET
By: AnalysisWatch
European stocks reversed early losses on Thursday as investors remained bullish even after minutes of the Federal Reserve's policy meeting and comments from a European Central Bank official showed the inflation outlook had not improved.
Stocks have staged a strong rally in the past two months on hopes that the pace of monetary tightening is in sight, but remain vulnerable to central bank warnings that the fight against price pressures is far from over.
According to minutes of their July 26-27 monetary policy meeting released Wednesday, Federal Reserve officials saw "a few signs" late last month that inflationary pressures in the U.S. were easing.
ECB board member Isabel Schnabel told Reuters in an interview that the euro zone's inflation outlook had not improved since the July rate hike, suggesting she favored another big interest rate hike next month, even as recession risks tighten.
"After a very strong run for risk assets thanks to the narrative that we may have seen "peak inflation," that came to an end yesterday as multiple headlines emerged pouring cold water on the prospect that central banks were about to stop raising rates," said analysts at Deutsche Bank (ETR:DBKGn).
The latest central banks to raise rates were the Reserve Bank of New Zealand on Wednesday and the Norwegian bank on Thursday, both with a 50 basis point hike.
Investors urgently need to hedge: the environment that has led to this bear market rally, which we recognize we didn't see as strong as it has been, is about to change, said Mohammed Apabhai, head of Asia Pacific Trading Strategies at Citigroup (NYSE:C).
"The Fed has noted that monetary conditions have loosened and is now poised to tighten further." Specifically, it is now set to double the pace of quantitative tightening from the current $47.5 billion to $95 billion as of September 1, "Apabhai said, referring to the Fed's balance sheet reduction.
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