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European stocks were back in the red Thursday after the Federal Reserve approved its biggest interest-rate increase since 1994.
While the largely expected Fed move prompted a rally on Wall Street as investors welcomed the effort to quell inflation, that optimism fizzled Thursday as investors contemplated the danger posed to the economy following years of low rates and tepid consumer price increases.
When it comes to the Fed's "dot plot" and economic projections, Allianz's Mohammad El-Erian said the "front-loading" of the Fed's rate hikes as well as the decline in the pace of economic growth signaled a "stagflationary baseline."
Global central banks are rushing to tighten policy faced with similar economic woes. Earlier Thursday, the Swiss central bank surprised the market by lifting interest rates and in the U.K., the Bank of England is set for another increase in rates, the fifth since December.
Read: Bank of England Looks Split Over Size of Interest Rate Hike
Household consumption in the U.K. looks strong despite the increasing short-term challenges for consumers, said Berenberg.
Record labor demand and low unemployment is likely supporting incomes, and while consumers are struggling with rising inflation, there is no evidence yet that demand is weakening, said senior economist, Kallum Pickering. The consumer faces many months of pain ahead, but long-term fundamentals due to flexible labor markets and solid balance sheets signal that the situation is favorable, Pickering said.
"Following the Brexit vote and Covid-19, the U.K. consumer consistently outperformed expectations, and we see no obvious reason why this will not happen again. Things are bad now, but nothing lasts forever."
Stock futures slumped, suggesting the post-Fed rally on Wall Street wasn't likely to last, with rate-sensitive technology shares set to lead U.S. losses.
In bonds, the yield on benchmark 10-year Treasurys declined to 3.370%.
Geneva-based Syz Bank said the long end of the Treasury curve could soon offer buying opportunities, adding that the Fed is now firmly resolved to conduct a restrictive monetary policy via rapid and pronounced tightening in order to bring down inflation.
"The 75bps becomes the new 50bps." While this strategy involves the risk of a severe slowdown or even a recession, the fact "the Fed is now very quickly aligning itself with market expectations shows it's determined to regain credibility" is positive.
Ahead of the opening bell, Twitter shares rose 2.6% after The Wall Street Journal reported that Elon Musk is expected to confirm that he wants to buy the social-media company when he speaks to its employees Thursday.
Sterling was lower again ahead of the Bank of England policy decision where it's expected to lift interest rates but by much less than the Fed's 75 basis points rise.
U.K. inflation is near double digits, but unlike the Fed, the BOE doesn't have the flexibility to raise rates aggressively as the U.K. economy is shrinking, said 60 Second Investor managing editor Kathy Lien. Although the BOE will signal further rate rises beyond Thursday, a smaller move should limit demand for sterling, Lien said.
Economists polled by the WSJ expect the BOE to lift its key rate by 25bp to 1.25%.
Read: Bank of England Could Be Forced to React to Pound's Weakness.
The Swiss franc hit a two-month high versus the euro after the Swiss National Bank unexpectedly raised interest rates and signalled further rises.
The SNB lifted its key rate by 50 basis points to -0.25% to stem inflation, whereas most analysts expected rates to remain unchanged. The SNB said it cannot be ruled out that further rate increases will be necessary in the foreseeable future to stabilise inflation.
The central bank also reiterated its willingness to intervene in the foreign exchange market but omitted its usual line that the franc remains highly valued.
Eurozone bond yields were mixed in early trading and Ostrum Asset Management said the most likely path forward from the European Central Bank is more explicit guidance regarding the use of reinvestments under the PEPP.
"The ECB may reinvest bond proceeds in advance of repayments in times of market stress and depart from the existing country allocation," said Axel Botte, market strategist.
He reckons an explicit yield target or ceiling is unlikely but judging by the ECB's reaction to a 4% level in the 10-year BTP yield--and why the ECB called an emergency meeting Wednesday--"this could be it."
Commerzbank said investors remained hopeful that the ECB's decisions taken at its ad hoc meeting will be sufficient to contain spreads in eurozone bond markets.
In principle, flexibility in PEPP reinvestments argues for tighter spreads, but the ECB itself apparently thinks that PEPP reinvestments won't be enough, as it's working on a new tool which could be an Anti-Fragmentation Purchase Facility, said Christoph Rieger, head of rates and credit research.
"As it may lack teeth and the communication of the size and design may not be as explicit as some are hoping, we doubt that this will be enough to appease market concerns longer-term."
Citi said the 10-year Italian BTP-German Bund yield spread is likely to widen.
"The ECB's emergency action does not dissuade us from our 275 basis points target for 10yr BTP-Bund [spread]."
Citi's said the ECB wasn't very interested with 10-year BTP-Bund yield spreads of around 200bps and the 10-year BTP yield just under 3.5%, but has been forced into the necessary minimum: flexibility in reinvestments from the PEPP and tasking the committees to accelerate work on a new facility.
UniCredit Research said the Italian Treasury's buyback of 2025-dated BTPs should provide additional support to the short end of the BTP curve.
The Treasury will buy back BTPs maturing in February 2025, June 2025 and July 2025 for a maximum amount of EUR3 billion. The buyback comes after the ECB's ad-hoc meeting which UniCredit Research said was strong on commitment but weak on details.
"Investors, however, recognized the determination of the ECB to tackle an unwarranted fragmentation of bond markets within the eurozone and gave the central bank an initial thumb-up."
Oil prices were little changed after U.S. inventories rose by more than expected and as investors weighed the effect on the economy from the Fed's 0.75 percentage-point rate rise.
Volatility in the oil market appears to be on the rise again as the economic outlook darkens, said Citi Research analysts, citing the IEA's latest "bearish" report.
Metals prices were mixed, with sentiment remaining weak given the macro economic forecast of rising inflation and China's strict covid policy hampering a restart in industrial activity.
"It does seem like they are trying to kick the can down the road when it comes to a recession in what the Fed calls a 'soft landing'," analysts at Marex said.
Fitch said steel prices could trend higher as Chinese infrastructure demand kicks in from the second half onward.
"Demand recovery in China appears to be outpacing supply recovery as Covid-19 restrictions are eased."
Dwindling exports from Ukraine due to the Russian invasion as well as an unwillingness from some market participants to import Russian-made steel are also supporting prices of the construction material, Fitch said.
Swiss National Bank Unexpectedly Increases Interest Rates as Inflation Rises
The Swiss National Bank on Thursday unexpectedly increased its policy interest rate for the first time since September 2007.
The country's central bank increased its policy rate by half a percentage point, to minus 0.25% from minus 0.75%, in an effort to tame inflation. Economists polled by The Wall Street Journal had expected the bank to leave rates on hold.
Bank of England Could Be Forced to React to Pound's Weakness -- Market Insight
Weak economic data has complicated the picture for the Bank of England's monetary-policy meeting Thursday but policymakers' hands could be forced in the longer term by the pound's relative weakness against the dollar fuelling U.K. inflation.
Investors are pricing in 75 basis points worth of hikes across the next two meetings, with the major intrigue being whether a 50-point hike will come immediately. Data released Monday, which showed a surprise contraction of the U.K.'s gross domestic product in April, could tip the balance of the vote among the nine-member Monetary Policy Council toward a 25-point hike. Analysts at Capital Economics note that the winding down of pandemic health programs subtracted 0.5 percentage points from GDP growth in April, without which it would have increased by 0.1%, but say the coming months could still see a chance of recession as higher inflation and interest-rate effects filter through.
European Leaders Arrive in Ukraine as Kyiv Renews Calls for More Military Support
Jyske Bank Is In Talks to Acquire Handelsbanken's Danish Operations
Jyske Bank AS said late Wednesday that it is in discussions to acquire Svenska Handelsbanken AB's Danish activities.
No agreement on the acquisition has been reached, it added.
Dassault Systemes Says on Track to Achieve 2024 EPS Target
Dassault Systemes SE on Thursday said it is on track to hit its 2024 earnings-per-share target and cash in on what the company called significant long-term growth opportunities.
The French software maker said it aims to achieve a non-IFRS EPS of 1.20 euros ($1.25) in 2024, as more customers turn to the cloud.
Erste Bank Picks Willi Cernko as New CEO
Erste Group Bank AG has appointed Willi Cernko to replace Bernd Spalt as chief executive officer, after the bank said that Mr. Spalt's term wouldn't be renewed over disagreements on the long-term direction of the group.
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