The European Central Bank (ECB) has raised interest rates for the first time in more than a decade, and markets have followed suit.
Key points:
- The ECB’s key interest rate has stopped being negative for the first time since 2014
- Gas flows from Russia to Germany have resumed via the Nord Stream 1 pipeline
- Tech stocks continue to rise in the US, despite signs that the broader economy is slowing
The ECB’s benchmark deposit rate rose 50 basis points more than expected to 0%, the first time it has been non-negative since 2014.
It was the ECB’s first rate hike since 2011, but NAB’s Tapas Strickland said traders expected it to be one of many.
“The market has priced in a rate hike for the ECB, with some chance of 75 basis points at the next meeting in September and about a 70% chance of another 50 basis point hike in the price of in October, but little change at the expected high point of the cycle,” he wrote.
Capital Economics chief European economist Andrew Kenningham said he also expected many more rate hikes as the ECB tried to catch up with central banks around the world that were scrambling to raise rates to contain rampant inflation.
“We believe this will be the first of a series of hikes that will see the ECB raise the deposit rate to around 2 percent next year,” he wrote.
“We also think the bank will eventually have to use its new asset purchase program to avoid another eurozone crisis.”
A possible trigger for this crisis is the collapse of the Italian coalition government of former ECB President Mario Draghi.
The upheaval, which means there will be an election in the country on September 25, saw Italian government bonds sell off on fears of another debt crisis for the nation, with the difference, or gap, between Italian and German 10-year bond yields (interest rates) increasing to 2.3 percentage points.
However, traders were reassured by another development on the continent, with the resumption of gas flows from Russia to Germany via the Nord Stream 1 pipeline.
“Indications are that gas flow will restart at 40 percent of capacity, around what it was before the maintenance shutdown, which is more than the market expected,” Strickland said.
“Russian President Putin, however, warned that flows could still fall by around 20% as early as next week.
“After initially falling as much as 8 percent, European natural gas futures are unchanged on the day.”
US markets are winning again in technology
The technology sector once again led US markets higher, with better-than-expected results from Tesla, released just after the close of trading yesterday, boosting the manufacturer’s share price autos nearly 10 percent to $815.12.
The tech-heavy Nasdaq gained 1.4% to 12,060, the broader S&P 500 rose 1% and the Dow Jones Industrial Average rose 0.5%.
“So far in this bear market rally, the S&P500 is up 9.1%, although it’s still 16.6% off its peak,” Strickland said.
“Earnings reporting season for tech companies has at least been better than feared, although guidance for non-tech and non-financial sectors has been weak on the outlook and consistent with a slowdown of the economy
“Overnight, US telco AT&T said there had been an increase in overdue payments on phone bills.”
The local ASX SPI 200 futures index pointed to modest gains for the Australian share market, up 0.2 percent to 6,689.
The Australian dollar was fairly flat at 69.26 US cents, having gained ground since the start of the week.