Pro Perspectives 6/9/22

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June 9, 2022

We get the big inflation report tomorrow. 
Has it peaked?  Has it not peaked?  We’ve talked about this earlier in the week.  It’s unlikely that inflation has peaked.  The reports we’ve seen globally, for the month of May, have shown hotter, not cooler prices. 
Let’s talk about the bigger news for markets today.
The European Central Bank this morning announced the end of QE, and telegraphed, not just a liftoff of interest rates, but a series of interest rate hikes to begin in July.
With this in mind, let’s revisit the end of my note yesterday, where we discussed the potentially explosive intersection of fragile European sovereign debt and hawkish European monetary policy.  
As I said, “it doesn’t take much imagination to see the danger zone for these two countries (Spain and Italy) emerging quickly, if the ECB were to telegraph a series of rate hikes, while simultaneously ending QE.
They ECB has done just that. As of July 1, the ECB will be out of the European bond market (with the exception of reinvesting principal of their current bond holdings, at maturity).  
Remember, the only reason the euro and the EU didn’t collapse under the insolvency of Portugal, Italy, Spain and Greece, a decade ago, is because of official intervention — led by the European Central Bank’s promise to become the buyer of last resort of government bonds (and pretty much anything else that threatened the euro).
These countries are no more healthy today.  In fact, they are worse off (deeper deficits, higher debt).   And now the ECB has vowed to end the bond market lifeline, in the name of inflation fighting. 
This is a greenlight for speculators to attack the European bond markets, – sovereign and corporate bonds.  
So, how did those markets perform today?  Not well.