Stocks ticked higher with US equity futures after the European Central Bank raised its key rate by a larger-than-expected 50 basis points, joining global central banks driving outsized rate increases to quell inflation. Bonds slumped and the euro rose.
The Stoxx Europe 600 Index initially fell before swinging into the green. Contracts on the S&P 500 and Nasdaq 100 also quickly erased losses to trade higher. Government bonds across the region slumped, with the yield on the benchmark German bund rising 8 basis points.
Thursday’s hike, the first increase in 11 years and the biggest since 2000, ends an era of negative rates that helped the region’s economies navigate the global financial crisis, the sovereign debt meltdown, and then the 2020 pandemic. It comes as a brewing political crisis in Italy ramps up the pressure on the ECB to shield the most vulnerable eurozone members from market speculation through a new crisis management tool.
If the ECB’s tool is successful in leveling the playing field for countries with higher borrowing costs, and Russia keeps up gas exports, prospects for European markets are “very, very good,” said Andrew Sheets, Morgan Stanley’s chief cross-asset strategist.
The euro extended gains, rising 0.8% to $1.0263. Traders raised wagers on the pace of tightening, pricing an additional 137 basis points of hikes by year-end compared with less than 120 basis points earlier.
Thursday’s hike in the deposit rate to 0% was twice the amount telegraphed until just days ago and was predicted by only four of 53 economists surveyed by Bloomberg.
Risk sentiment remains fragile as investors debate whether equities have reached a trough after this year’s selloff amid the war in Ukraine, a slowdown in China, and the prospect of a US recession. The resumption of Russian gas exports to Europe through the Nord Stream is set to provide some relief for the continent that’s racing to store the fuel before the winter.
“The worst scenario would be gas cut off and a weak fragmentation tool from the ECB because then I think you can see the market hit from both the growth side and the sovereign risk side,” Sheets said in an interview.
Some of the main moves in markets:
Stocks
- Futures on the S&P 500 rose 0.2% as of 8:40 a.m. New York time
- Futures on the Nasdaq 100 rose 0.5%
- Futures on the Dow Jones Industrial Average were little changed
- The Stoxx Europe 600 rose 0.2%
- The MSCI World index was little changed
Currencies
- The Bloomberg Dollar Spot Index fell 0.3%
- The euro rose 0.8% to $1.0263
- The British pound was unchanged at $1.1973
- The Japanese yen fell 0.3% to 138.56 per dollar
Bonds
- The yield on 10-year Treasuries advanced two basis points to 3.04%
- Germany’s 10-year yield advanced nine basis points to 1.35%
- Britain’s 10-year yield advanced seven basis points to 2.21%
Commodities
- West Texas Intermediate crude fell 3.9% to $95.98 a barrel
- Gold futures fell 0.7% to $1,705.60 an ounce.
Source By: Bloomberg