As Inflation Soars, Central Banks Scramble to Lift Rates
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Europe’s central banks signaled growing concern about soaring inflation and a determination to quench it by raising interest rates, a policy shift that creates risks for investors and the world economy. The hawkish moves in Europe reflect a growing appreciation among policy makers that inflation won’t come down as quickly as they had hoped. It echoes a similar shift in the U.S., where Federal Reserve Chairman Jerome Powell signaled last week that the U.S. central bank would begin steadily raising interest rates in mid-March. The moves and signals from Europe’s central bankers Thursday rumbled through markets globally, with the euro and the pound strengthening 1% against the dollar, government bond markets selling off and stocks dropping on the prospect for tightening of policy in the months ahead. The Bank of England raised its key interest rate for a second consecutive meeting, to 0.5%, saying it expected annual inflation to accelerate above 7% within months. It also said it would begin slowly reducing the size of its bondholdings. It was the first time the BOE has raised rates at consecutive meetings since 2004. In Frankfurt, the European Central Bank kept its key interest rates unchanged, but at a news conference President Christine Lagarde left the door open to an interest-rate increase later this year, a turnabout from her position seven weeks ago.
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Statements by the European Central Bank (ECB) put downward pressure on the SMI in the afternoon. The SMI lost 1 per cent to 12,234 points. Among the 20 SMI stocks, there were 14 price losers and six price winners. A total of 40.42 (previously: 48.12) million shares were traded. Although the franc weakened with the euro appreciably strengthening after the ECB statements, this did not support the Swiss stock market. From a market perspective, ABB's (-2.5%) financials were neutral, Bernstein analysts announced. However, the outlook for 2022 was cautious. Roche (-2.4%) reported mixed results for 2021, Bank of America stated. Group sales were 1 percent above consensus expectations, but earnings per share were 3 percent below. Group EBIT missed the consensus by 4 per cent. In contrast, Swisscom was the day's winner in the SMI, rising by 1.9 per cent. Citigroup spoke of solid business figures.
European equity indices closed sharply lower on Thursday after the European Central Bank (ECB) said it was "concerned" about accelerating inflation in the eurozone and suggested it could curb its monetary support sooner than expected. The Stoxx Europe 600 index fell 1.8% to 468.6 points. In Paris, the CAC 40 and the SBF 120 each gave up 1.5%. In Frankfurt, the DAX 40 shed 1.6% and in London, the FTSE 100 was down 0.7%. Banking stocks rose after comments from the ECB reinforced expectations of a first rate hike this year. Societe Generale gained 1.7%, Crédit Agricole SA gained 1.3% and BNP Paribas 0.3%. In Frankfurt, Deutsche Bank jumped 4.9% and Commerzbank gained 5.2%. Unicredit gained 2.3% in Milan. Atos (-7.5%) does not intend to sell its Big Data & Cybersecurity (BDS) division, despite press reports the previous day that Thales (-0.4%) was interested in this activity. Publicis (+0.5%) expects its net income, the equivalent of turnover, to grow between 4% and 5% in organic terms in 2022, following the publication of record results for the 2021 financial year. Vaccine maker Valneva (-3.7%) expects 2022 to see a further sharp rise in revenue, which has already more than tripled in the past year thanks in large part to a now terminated contract with the UK. Oil and gas group Shell (+1.4% in London) reported better-than-expected fourth-quarter results and announced that it will launch an $8.5bn share buyback programme in the first half of the year.
The Dow Jones Industrial Average (DJIA) closed down 1.5% at 35,111.16 points and the broader S&P 500 index fell 2.4% to 4,477.44 points. The Nasdaq Composite Index dropped 3.7% Thursday, its largest one-day decline since September 2020. Facebook owner Meta Platforms Inc. lost a record $232 billion in market value Thursday after releasing a disappointing financial forecast, while shares of other companies including PayPal Holdings Inc. and Spotify Technology SA also tumbled. In the wake of Meta, social networks Snap (-23.6%), Pinterest (-10.4%) and Twitter (-5.6%) fell. Spotify Technology (-16.7%) reported an 18% year-on-year increase in users in the fourth quarter, in line with its expectations. However, the company said it expects subscriber growth to slow in the current quarter. T-Mobile US (+10.2%) reported better-than-expected net earnings per share for its third quarter and raised its full-year guidance. Merck (-3.7%) reported better-than-expected fourth-quarter results, helped by sales of its oral Covid-19 treatment Monulpavir. US semiconductor maker Qualcomm (-4.8%) on Wednesday reported record revenue and earnings in the first quarter of its 2021-2022 fiscal year, helped by sustained growth in sales of chips for mobile devices. Since the start of this year, the Nasdaq Composite has lost more than 11%, while the S&P 500 has slid 6.1%. The Dow, in comparison, has fallen 3.4%.
In Asia, major indexes broadly closed with gains on Friday. With the exception of the stock exchanges in the Chinese heartland and Taiwan, all trading centres resumed trading following the Lunar New Year holiday break. The Hang Seng Index increases by a good 3 per cent. In the internet sector, Alibaba improves by 4.8 per cent. Meituan rises 2.8 per cent and Tencent 1.2 per cent. The shares of the bank HSBC, which are also traded in Hong Kong, advance by 4.6 per cent. Shares in Chinese manufacturers of electric cars are also sought after, as they have reported strong sales figures. Li Auto jumps 12.4 per cent and Xpeng 10.3 per cent. BYD is 2.8 per cent ahead. A slightly weaker yen gives the Japanese stock market a tailwind. The Nikkei 225 index rises by 0.6 per cent. On the South Korean stock market, the Kospi is up 1.5 per cent.
European government bonds sold off during the ECB news conference. The moves were sharpest among those issued by southern European governments whose markets are considered to be more dependent on purchases by the ECB. The 10-year Italian sovereign bond yield climbed to 1.648% in the biggest rise since December 2020, while the equivalent German bund yield rose to 0.153%, the highest level since March 2019. The yield on the benchmark U.S. 10-year Treasury note ticked up to 1.847% from 1.825% Thursday.
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