Financial markets according to the Bank of Portugal – Negócios Iniciativas
In this market, there was “a sharp rise in rates of return, in particular, in the shorter maturities, accompanying the rise in expectations and the subsequent realization of increases in reference rates, which happened”, said Hélder Rosalino. But he warned that there is some reduction and change in the slope of the yield curves at the end of 2022, which have shown these expectations of a recession or a slowdown in the economy in 2023.
Hélder Rosalino pointed out that real interest rates are still very negative in the short term, because the absorption rates are almost 10% and the reference rates are, in the case of the European Central Bank, at 1.5% and the Fed at 4 %. “Real short-term interest rates are negative, but medium and long-term real interest rates have risen significantly and they are given by the leverage rates implicit in five-year survivor swaps. the real interest rate is positive in the euro area and in the United States”, said Hélder Rosalino.
He also referred that “interest rates on Portuguese debt have remained at levels lower than those on Italian and Spanish public debt, since 2020, and this has been positive, which demonstrates confidence in the Portuguese economy and Portuguese public finances”.
stock market
“Losses, a climate of risk aversion, high volatility, this is what characterizes the stock market in a context of less favorable prospects for economic growth of sharp rises in interest rates”, considered Hélder Rosalino.
Shareholder volatility is higher than in the pre-pandemic period. Hélder Rosalino highlighted “the implied volatility in bonds, and options on bonds, of the United States Treasury”, which is higher in bonds than in shares. “This was not at all normal because the bond market, in principle, is a more stable market than the stock market, but risk aversion, interest rates and considerations lead to this volatility”.
Treasury bonds and private debt are registering the worst returns in 2022, since at least 2000. Equities are registering devaluations, which, from a historical perspective, are not particularly expressive. The slowdown in economic activity and the rise in interest rates could contribute to an increase in the intensity and reassessment of asset prices.
forex market
There is indeed a drop in the euro since mid-2021, a strengthening of the dollar associated with the Fed’s aggressive interest rate hike cycle and safe haven flows. “There is a role that the dollar continues to play in periods of intense and naturally this leads to the appreciation of the dollar and, in particular, occurred with the beginning of the war in Ukraine”, explained Hélder Rosalino.
After a sharp rise, the financial system systemic stress indicator has been decreasing in recent weeks, reflecting an improvement in conditions in the money and capital markets.