ECB Raises Rates by Half-Percentage Point in First Hike Since 2011
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The European Central Bank raised interest rates by a larger-than-expected half-percentage point and unveiled a new plan to buy the debt of Europe’s most vulnerable economies, taking bold action to protect the currency union as it navigates the twin threats of skyrocketing inflation and slowing economic growth. The move takes the ECB’s key interest rate to zero, ending the bloc’s eight-year experiment with negative interest rates and capping two weeks of drama for Europe, which saw Russia cut and then restart supply of vital natural gas and the government of Italy collapse. The rate increase comes despite rapidly accumulating challenges facing Europe’s economy and the currency union’s cohesion—from a looming energy crisis to a protracted war next door, mounting political instability at home, and what many economists think has become an inevitable recession. Some of these could make it difficult for the ECB to focus on combating inflation. The ECB’s decision brings it more into line with other central banks, including the Federal Reserve, underscoring how the bank’s top officials are increasingly worried about high inflation. The Fed is expected to raise its policy rate by 0.75 percentage point later this month to a range between 2.25% and 2.5%. Inflation has risen to about 9% on both sides of the Atlantic, and shows no sign of abating soon. A new policy instrument is the latest addition to the ECB’s crisis-fighting arsenal. A decade ago, former ECB President Mario Draghi unveiled an unlimited bond-buying program, known as Outright Monetary Transactions, that swiftly ended the region’s debt crisis, even though it has never been used. The new tool will have easier conditions than Mr. Draghi’s OMT, making it easier to deploy at speed, and like the OMT, it is potentially unlimited in scale. It will target sovereign and potentially private debt to curb unwarranted increases in borrowing costs in parts of the bloc, the ECB said. ECB officials hope that, as with the OMT program, the new bond-buying tool will calm markets without needing to be used.
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Thursday, the SMI gained 0.7 per cent to 11,135 points. Among the 20 SMI stocks, there were 13 price gainers and seven price losers. 33.7 (previously: 25.66) million shares were traded. Across Europe, financial services providers benefited from rising interest rates. In Switzerland, Partners Group and UBS climbed 2.9 and 1.5 per cent respectively, but Credit Suisse fell 0.7 per cent. Despite solid business figures, Roche slipped 0.5 per cent. The pharmaceuticals division performed in line with expectations. Investors may have been bothered by the performance of Covid-19 drugs. These missed both market and Citigroup estimates. The pharmaceutical company will have a new boss next year: Thomas Schinecker, who currently heads the diagnostics division, will take over from Severin Schwan in March 2023. The share price of industrial group ABB climbed 1.6 per cent. Citigroup spoke of positive momentum in the business figures: Order intake and adjusted operating EBITA were better than expected. Givaudan was down 1.6 per cent. "Sales are growing stronger than expected, but profit missed expectations," a trader said, criticising the figures. Presumably, the company could not pass on costs. Business figures were also published by a number of second and third-tier companies, with Leonteq (-10.7%), Bystronic (-10.6%), Bossard (+8.2%) and Cembra (-7.3%) showing the strongest market reactions. Addex (+73.8%) averted a default in the short term.
European stock indices closed mixed on Thursday after the European Central Bank (ECB) raised its key interest rates by half a percentage point, a move partly anticipated by the market in recent days. The Stoxx Europe 600 index fell 0.4% to 424.4 points. In Paris, the CAC 40 and SBF 120 gained 0.3% and 0.2%, respectively. In Frankfurt, the DAX 40 lost 0.3% and the FTSE 100 in London fell 0.1%. In Milan, the FTSE MIB was down 0.7% while the Italian index was down around 2% by midday following the announcement of the resignation of Council President Mario Draghi. Seb (-10.2%) revised its forecasts for the current year sharply downwards after suffering a clear slowdown in demand in the second quarter. Valneva dropped 4.3% as the European Commission significantly reduced the volume of Covid-19 vaccine doses it will purchase from the biotech company. Sartorius Stedim Biotech (+8.3%) confirmed its financial targets for 2022, after posting a strong increase in sales in the first half of the year. Publicis (+5.1%) raised its overall outlook for 2022 after posting record results that beat analysts' forecasts in the first half. Italian bank shares fell due to political uncertainty in Italy. Intesa Sanpaolo gave up 2.8%, UniCredit lost 3.4% and Banco BPM shed 4%.
U.S. stocks climbed Thursday, with investors picking up beaten-down growth shares after another batch of earnings reports from bellwether companies including Tesla. The S&P 500 added 39.05 points, or 1%, to close at 3998.95, near its high of the day. The technology-focused Nasdaq Composite Index rose 161.96 points, or 1.4%, to 12059.61. After flipping between small gains and losses for much of the session, the Dow Jones Industrial Average advanced 162.06 points, or 0.5%, to 32036.90. Leading the S&P 500, Tesla shares surged $72.62, or 9.8%, to $815.12 after the company reported better-than-expected quarterly results. The electric vehicle maker, however, reported its first decline in quarterly profit in more than a year. Stocks have steadied recently after a challenging first half of 2022, with the three major averages on pace for gains this week and for July. Earnings reports from companies like Netflix and Tesla have given investors greater confidence to buy up previously discarded stocks. Thursday also brought a slew of disappointing corporate dispatches. AT&T shares fell $1.56, or 7.6%, to $18.92 after the company lowered its 2022 target for free cash flow. Verizon Communications fell $1.41, or 2.9%, to $47.66, the blue-chip Dow’s worst-performing stock. Airline stocks retreated as well. United Airlines, which cautioned about the effects of higher fuel prices, fell $4.24, or 10%, to $37.44. American Airlines declined $1.13, or 7.4%, to $14.08 after it posted a profit that fell short of analysts’ expectations. Shares of cruise lines dropped after Carnival said it would sell $1 billion of new stock. Carnival fell $1.24, or 11%, to $9.85 and was the biggest laggard on the S&P 500. Royal Caribbean Group and Norwegian Cruise Line Holdings were also among the index’s top decliners.
In Asia, major indexes closed mixed. The Nikkei-225 in Tokyo added 0.5 per cent. The Bank of Japan (BoJ) maintained its ultra-loose monetary policy the previous day, but raised its inflation forecast for the current fiscal year. The indices in Shanghai (-0.3%) and Hong Kong (+0.1%) were little changed. The Kospi edged 0.3 per cent lower.
Treasury yields posted their biggest declines of the past three to five weeks on Thursday, reversing course from earlier in the day, after traders assessed signs of a slowing U.S. economy and President Joe Biden tested positive for COVID. The 10-year Treasury note was yielding 2.90%, down 14 basis points. The 2-year bond rate slipped by 15 basis points to 3.10%.
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