After the publication of data pointing to an uptick in wages, which are up +2.9% year over year (beating expectations and marking the strongest rise since June 2009), concerns that inflation would accelerate faster than planned in the United States – and therefore that monetary tightening would be sharper than expected (some investors are now forecasting four interest rate hikes from the Fed this year) – sparked a rise in U.S. yields (10-year rates in the U.S. reached 2.96% in February, their highest level since January 2014) and a sharp and broad-based correction across global equity markets.
Rates in France and Germany started to rise early on in the month (with the yield on 10-year OATs exceeding 1%), before declining again amid persisting political uncertainty in Europe: Italian elections with uncertain outcomes, five months of talks to form a coalition in Germany etc. European equity markets also corrected sharply. Having wiped all the gains recorded after the solid start to the year, this market downturn was also amplified by a surge in volatility (the VIX Index closed above 50 early in the month), urging quantitative investors to unwind a large number of “short volatility” positions.
This market downturn was also amplified by a surge in volatility (the VIX Index closed above 50 early in the month), urging quantitative investors to unwind a large number of “short volatility” positions.
Nevertheless, while some macroeconomic indicators are slightly down this month, most remain at record highs and the growth outlook in the Eurozone has been revised upwards. Fourth quarter corporate earnings have also been robust – with double-digit EPS growth in all major markets – and generally above expectations: 60% of Euro Stoxx companies released consensus-beating earnings.
However, depending on the earnings and guidance published by different companies, the market saw high return dispersion - with frequent 20% swings (up and down) recorded during the month.
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