Stocks Rally on News of Potential ECB Rate Hike

European stocks rose on Monday as the ECB announced that it is likely to lift its deposit rate out of the negative territory by September. Upping this action could help boost economic growth in Europe, which would be good news for all sorts of stock markets across America and worldwide.

Oil prices continue their downward spiral, while gold extends gains. The dollar falls yet further as investors book profits on greenback advances based on market expectations that the Federal Reserve will tighten the money supply by raising interest rates and printing more cash.

The STOXX 600 index rose 1.26%. The MSCI all-country world index gained 1% but is still down about 17% from its record high in January.
The major British, French, German, and Spanish equity markets are also up more than a percent each.

The markets were up earlier this week, but not all stocks rushed to join the party. The Dow Jones Industrial Average rose 1.98%. Stocks on Wall Street also gained more than 1%, though Nasdaq Composite initially lagged after briefly trading in red early this morning (It’s worth noting that some people call it “the new normal”).

The S&P 500 hit its lowest point this year on Friday, but investors are now betting that the Fed will come to save them. The “Fed put” was not enough for many traders who fear another economic downturn is right around the corner and may even be inevitable according to some economists like Steve Ricchiuto from Mizuho Securities.

The markets are currently in a very sluggish growth environment and it will not be helped by the Federal Reserve either. The bond market has gone down with interest rates rising, telling equity investors that they should also adjust their expectations for returns on investment because of this prospect; Ricchiuto added “you’re seeing an excess supply right now.”

Investors are getting nervous about the state of our economy, and they’re starting to move their money into safer investments like government bonds. The yield on 10-year Treasury notes rose 7.7 basis points today after closing at an all-time high 3 weeks ago when it reached 3.203%.

Advertisement

With more than half of S&P 500 constituents having fallen by 20% or greater from 52-week highs, it is clear that the bears are in full control.
Ameriprise Global Market Strategist Anthony Saglimbene agrees with this assessment noting “Given what we’ve seen thus far and where things stand today,” he said there’s no reason to expect anything different soon enough.”

Global markets took another turn as the European Central Bank President, Christine Lagarde accelerated an already sharp policy turnaround from all but ruling out interest rate hikes to now penciling in several. In addition, BlackRock Investment Institute cut their ratings of developed market equities due largely because they see inflation returning at a faster pace than expected which could lead Fed officials into overzealous efforts to prevent it; this has resulted in signs that economic growth may be slowing down globally including China where unemployment rates have reached record levels despite recent policies aiming for maximum employment within its borders.

With the prospect of higher rates, euros have been on a steady rise. The single currency rose about 3% since hitting its multi-year low 10 days ago and is up nearly 8% from this time last year when it was worth just under $1 per euro. “The doves are throwing in their towel,” said Holger Schmieding at Berenberg Bank adding that he expects ECB rate hikes of -25 basis points each month starting July through September and possibly till December.

The stock market’s recent recovery has investors optimistic about the future of Germany. A survey from Ifo Institute showed that business morale in May unexpectedly rose, helping calm investors for now. It is still a bear market rally where sticky inflation will be an issue down the line.

The World Economic Forum is back for its first in-person meeting in two years, with central bankers and the International Monetary Fund taking part in panels on how to tackle economic issues around the world.