Investing.com - European markets tense on Tuesday - {Ibex 35, CAC 40, DAX... - in a busy few days of central bank meetings.
Following last week's {rate hike by the European Central Bank (ECB) and on the eve of the US Federal Reserve (Fed) and {Bank of England (BoE) meetings, Ben Laidler, global markets strategist at investment and trading platform eToro, notes that "US monetary policy transmission is hampered by fixed rates and longer maturities". By contrast, "in the UK and Europe it is accelerated by higher debt levels, reliance on bank lending and floating rate debt. This backdrop is accelerating the slowdown," he says.
"The European Central Bank (ECB) signalled last week that it will probably not raise interest rates any further. With the official interest rate at 4.5 per cent, and after ten hikes, Germany is in recession and regional PMIs indicate contraction. For its part, the Bank of England (BoE) is considering a final hike, as the UK faces one of the highest inflation in the world. This is in stark contrast to the US, where rates have been higher for longer and the economy remains strong," Laidler explains.
"The transmission of US monetary policy is hampered by fixed rates and longer maturities. In contrast, in the UK and Europe it is accelerated by higher debt levels, reliance on bank lending and floating rate debt. This backdrop is accelerating the slowdown," adds the eToro strategist.
As he explains, "European banks are oversized compared to their economies and to the US. They are more tightly regulated and better capitalised than their transatlantic counterparts, and did not suffer from the contagion of the Credit Suisse (SIX:CSGN) collapse or the US banking crisis in March. Bank lending accounts for 80% of corporate funding, with the rest coming from the bond market."
"This split is reversed in the US. Banks have been tightening lending standards for a year and 43% of companies complain about the availability of capital. This is more than in the US despite its higher policy rates, as bond spreads have tightened. Moreover, with European companies' lower profitability and higher debt burdens, more are relying on perpetual financing," Laidler adds.
"UK household debt levels are higher than those in the US, while European household debt levels are much lower (see chart). The largest consumer segment is mortgages. Unlike the US, where a 30-year fixed-rate mortgage is the norm, there are huge variations in the UK and Europe. But the average is a shorter term of 25 years, with over 40% of these loans at a variable interest rate. It is not surprising that Scandinavian countries, where house prices are higher and variable interest rates are higher, have seen the biggest falls in house prices, ahead of US weakness," he concludes.
Translated from Spanish using DeepL.