World stocks experienced a decline from their 18-month highs, and the dollar gained strength on Thursday following the European Central Bank’s (ECB) decision to implement an eighth consecutive interest rate hike, with indications of further increases in the future.
ECB Raises Interest Rates, Market Sentiment Affected
The ECB’s move resulted in an interest rate of 3.5%, reaching its highest level in two decades. Prior to this, market sentiment had already been somewhat subdued due to the U.S. Federal Reserve’s unexpected signal that the pause in its rapid hiking cycle might be short-lived.
Rise in Bond Yields and Decline in Blue-Chips
In response, dealers continued to push both U.S. and German 2-year bond yields, which influence global borrowing costs, to their highest levels since March. The U.S. 2-year bond yield reached 4.8%, while the German 2-year bond yield approached 3.2%. As a result, blue-chip stocks in Paris and Frankfurt experienced declines of up to 0.7%.
Dollar Rebounds, Euro Remains Subdued
The dollar managed to recover from a four-week low against other major currencies, benefitting from a lackluster performance of the euro and a decline in the value of the yen overnight.
ECB Aims for Restrictive Interest Rates
The ECB emphasized its intention to raise interest rates to levels considered “sufficiently restrictive.” Close Brothers Asset Management Chief Investment Officer Robert Alster stated that he believes the inflation peak is approaching, which may result in a plateau. Alster suggested that even if the ECB raises rates once more, an extended holding period could follow.
ECB President’s Press Conference Focuses on Inflation and Rate Levels
ECB President Christine Lagarde’s upcoming press conference will concentrate on persistent core inflation and the potential upper limits of interest rates before they become excessively restrictive.
Fed’s Pause and the Impact on Benchmark Rates
The recent pause by the U.S. Federal Reserve marked its first in ten consecutive meetings. However, the benchmark funds rate window remains at 5-5.25%, significantly higher than the ECB’s new level.
China’s Central Bank Rate Cut and Market Reactions
China’s central bank recently reduced one of its key policy rates, reflecting concerns over the country’s struggling economy. The yuan reached a six-month low of 7.18 against the dollar before experiencing a slight recovery. Positive market sentiment emerged in Hong Kong and Shanghai, resulting in stock market gains of over 1.5% and 2% respectively, driven by expectations of further economic stimulus.
Bank of Japan Maintains Monetary Policy, Yen Declines
The Bank of Japan (BoJ) is likely to maintain its ultra-easy monetary policy, causing the yen to fall to a six-month low. The currency experienced a 1% drop, reaching 141.50 against the dollar. Market analysts are speculating about the possibility of the BoJ intervening in the foreign exchange market if the dollar-yen exchange rate continues to rise.
Asian Markets Show Mixed Results
MSCI’s broadest index of Asia-Pacific shares, excluding Japan, closed around 0.7% higher, reaching a two-month peak. In contrast, Japan’s Nikkei index maintained its momentum, reaching a three-decade high. S&P 500 futures remained flat, while MSCI’s global index, covering 47 countries, experienced a marginal decline after five consecutive days of gains.
Fed Remains Firm on Inflation Targets
Bart Wakabayashi, branch manager at State Street in Tokyo, highlighted the Federal Reserve’s steadfast stance. The Fed emphasizes inflation, the labor market, and wages, aiming to achieve a 2% inflation target. Any inflation rate above this threshold will prompt the Fed to take necessary actions to bring it down.
Expectations for Future Rate Hikes
Following the meeting, Fed funds futures pricing did not experience significant changes. However, expectations for a rate hike next month slightly increased, while prospects for rate cuts were pushed further into 2024.
Impact on Currencies and Commodities
The Australian dollar received support from positive expectations and robust Australian jobs data, remaining firm at $0.6822. Conversely, the New Zealand dollar faced challenges as data revealed that the economy had entered a recession this year. Brent oil maintained stability at $73.29 per barrel, while gold, which does not generate income, dipped to a two-week low of $1,934 per ounce.
