Europe – Recession Risks Further Mount | Harris Fraser
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24 November, 2022
Europe – Recession Risks Further Mount

After 2 months of larger corrections, although major risk factors of recession and energy crisis has not faded, European markets mounted a comeback, market sentiment improved on the back of optimism over future monetary policy. Over the month of October, the European STOXX 600 index gained 6.28% (7.33% in US$ terms).

Inflation remains unresolved, not only did the headline figure soar as the Eurozone CPI further rose to 10.7% YoY and hit a record high in October, the core CPI figure also hit a new high and showed no signs of easing.  While the ECB held raised rates by 75 bps late in October as expected, ECB President Christine Lagarde admitted that inflation remains too high, and rates would needed to be further raised to ensure expectations remain anchored. Even as the Bank refused to offer guidance on future policy direction, we believe monetary tightening will continue, and the market is too optimistic over the monetary path, and the continued hiking should put pressure onto investment markets.

Other than monetary policy pressures, risk factors arising from other sources have remained unchanged over the month. Fundamentals remain weak, confidence also stayed at trough levels as concerns over the Ukrainian situation, energy security, and soaring inflation dented consumer and corporate sentiment. With the risks of economic recession imminent, energy crisis remained unresolved due to the situation in Ukraine, and an expected extension of the monetary tightening due to sustained inflation, we maintain our underweight call on European equities before the risk factors dissipate.


 

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