European stock exchanges surged ahead of Fed and ECB decisions

On European stock exchanges, stock prices rose on Wednesday morning, following a sharp decline in the previous two days, as investors awaited decisions from the U.S. Fed and messages from the extraordinary meeting of the European Central Bank (ECB) leaders.

The STOXX 600 index of leading European stocks was up 0.6 percent at 9:30 AM.

Meanwhile, the London FTSE index strengthened by 0.57 percent to 7,228 points, while the Frankfurt DAX rose by 0.80 percent to 13,410 points, and the Paris CAC increased by 1.05 percent to 6,012 points.

A spokesperson for the European Central Bank stated this morning that the bank’s Governing Council will hold an extraordinary meeting regarding developments in the government bond market.

It is still unclear whether the ECB will issue a statement following this meeting, and investors hope for messages that could halt the sell-off of bonds from southern European countries, which has sharply decreased the stock prices of local banks, especially Italian ones.

This morning, the index of the Italian banking sector jumped more than 6 percent after a sharp decline in previous days.

Asian markets are trading uncertainly, with the MSCI index of Asia-Pacific stocks, excluding Japan, being almost unchanged compared to yesterday around 9:30 AM.

On the Tokyo Stock Exchange, the Nikkei index slid by 1.1 percent, while stock prices in Australia and South Korea fell between 1.3 and 1.8 percent. In Shanghai and Hong Kong, however, they rose between 0.5 and 1 percent.

The rise in Chinese stock markets is attributed to better-than-expected macroeconomic data, indicating a recovery of the world’s second-largest economy after growth was slowed by strict COVID-19 measures.

This morning, it was reported that industrial production in May increased by 0.7 percent, while analysts expected a further decline after a 2.9 percent drop a month earlier.

Retail consumption, on the other hand, fell by 6.7 percent in May, less than the 7.1 percent that analysts expected in a Reuters survey. In April, consumption fell by about 11 percent.

Is the Fed raising rates by 0.75 percentage points? 

On other Asian markets, investors are reacting to yesterday’s further decline in stock prices on Wall Street for the fifth consecutive day. Dow Jones fell by 0.50 percent, and S&P 500 index by 0.38 percent.

The world’s largest stock exchange has been under pressure since Friday when it was announced that consumer prices in May rose unexpectedly by a strong 8.6 percent year-on-year, the highest in over 40 years.

As a result, hopes that inflation peaked in April have faded, and due to persistently high inflation, investors fear that the Fed will be more aggressive than expected in tightening monetary policy.

Since March, the Fed has raised rates by 0.75 percentage points, to a range of 0.75 to 1 percent, and it was estimated that they would further increase them by 0.50 percentage points in June and July, and possibly in September.

However, speculation is now that on Wednesday, after a two-day meeting, Fed leaders could raise rates by 0.75 percentage points, which is also expected by analysts from several banks, including JP Morgan and Goldman Sachs.

Therefore, the money market now estimates that there is even a 90 percent chance of this, while just last week the odds were around 4 percent.

Investors fear that aggressive rate hikes by the Fed could push the U.S. economy into recession.

In addition to inflation and rate hikes, market uncertainty is a result of the war in Ukraine, supply chain disruptions, and slowing growth in the world’s largest economies.

As a result, the S&P 500 index fell for the fifth consecutive day yesterday, marking its longest negative streak since early January, diving deeper into bear territory, or 20 percent below its record level reached in early January.

– Due to very high inflation, rising interest rates, and an increasing risk of recession in the U.S. economy, the S&P 500 recorded its worst start to the year since 1962. – analysts at Goldman Sachs wrote in a market situation review.