The German stock market opened much weaker on Tuesday.

The FAZ index, which reflects the breadth of the market, falls by 1.2 percent to 2724 points, the Dax also drops significantly to 15,747 points last time.

Before the meeting of the American Federal Reserve Bank next week, investors' interest rate expectations have increased significantly, they say.

Martin Hock

Editor in Business.

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The yields on government bonds are rising accordingly. For the ten-year Bund, this means that for the first time since May 2019, a positive return is within reach. Most recently, this was minus 0.02 percent. However, the 0 percent mark has so far proven to be relatively stubborn. The yield on ten-year American government bonds also reached a new record level of 1.8145 percent. This is the highest level in two years. The trigger, however, was that the yield on two-year American government bonds exceeded the 1 percent mark for the first time since February 2020. This is used as an indicator for interest rate expectations. The fact that the Japanese central bank is assuming higher inflation than before did not exactly prevent investors from expecting interest rates to rise.The markets are currently assuming four rate hikes of 0.25 percentage points each in the current year for the USA.

Bond markets are beginning to acknowledge the reality of inflation and that central banks' monetary policies are still lagging behind but are now making intense efforts to catch up, they said. Bond market strategists assume that yields will continue to rise, at least until the first interest rate hike. At the same time, the yield curve appears to be flattening, meaning that short-term rates are currently rising faster than long-term rates. This is also seen as a possible sign of an economic slowdown, as a narrowing spread between long-term and short-term interest rates has a negative impact on banks' margins and thus usually on their lending.  

The development of the oil price also supports the scenario of higher interest rates. The price of a barrel (159 liters) of North Sea Brent crude oil has risen by more than a dollar since Monday to 87.59 dollars. The price of American WTI light oil rose by around $1.10 to $85.22 most recently. This is the highest level for more than seven years.  

The reason for the recent increase are drone attacks by Yemeni freedom fighters on oil production plants in the United Arab Emirates. In addition, the prices for physically delivered crude oil have risen significantly in Asia. High refinery margins resulted in greater demand. As a result, global inventories are also falling, which have currently fallen to their lowest level since the beginning of the Corona Pandemic. The difference between the price of crude oil and the forward price for immediate delivery has recently increased significantly.

In addition, Russia may only be able to meet about half of the increase in oil shipments planned for the next 6 months. Analysts believe that production may increase by as little as 60,000 barrels per day instead of the planned 100,000 barrels per day following the reduction in drilling activity last year. Russian production began to stagnate in September and fell below OPEC plus's planned production quota in December, reports Bloomberg. 

The Russian oil industry has waited a long time due to the uncertainty surrounding the pandemic, the news agency said, citing analysts from Bank of America and Vygon Consulting.

Some companies have limited production over the past year because they lost tax breaks and are now unwilling to invest until the Treasury restores those incentives, said Daria Melnik, senior analyst at Rystad Energy.

The Russian government recently said that tax breaks would not be possible again until 2023 at the earliest.