European Investors Cautious After ECB Rate Hike

European stock markets are trading cautiously on Friday morning, after the European Central Bank (ECB) raised interest rates for the first time since 2011, and more aggressively than expected.

The STOXX 600 index of leading European stocks was almost unchanged at 9:30 AM compared to yesterday.

At the same time, the London FTSE index strengthened by 0.12 percent to 7,279 points, while the Frankfurt DAX weakened by 0.14 percent to 13,227 points, and the Paris CAC by 0.02 percent to 6,199 points.

Asian markets are also trading cautiously, with the MSCI Asia-Pacific index being almost unchanged around 9:45 AM compared to yesterday, while on a weekly basis it is poised for the largest gain in two months.

This morning, the Nikkei index on the Tokyo Stock Exchange strengthened by 0.4 percent, while stock prices in Hong Kong rose by about 0.1 percent. In Australia, South Korea, and Shanghai, they fell between 0.1 and 0.6 percent.

Investors are unwilling to take additional risks after stock prices rose significantly this week, despite the worsening macroeconomic picture globally, high inflation, and central banks raising interest rates.

Yesterday, the European Central Bank raised key interest rates for the first time since 2011, by 0.50 percentage points, more than expected.

Thus, the refinancing rates for banks were raised to 0.5 percent, overnight borrowing rates for banks to 0.75 percent, and deposit rates to zero percent.

With this, the ECB ended its policy of negative interest rates, which it had maintained since 2014.

– The ECB’s rate hike of 0.50 percentage points surprised many. However, sharp rate increases have now become the norm in the world – says Susan Kilsby, an economist at ANZ.

The more aggressive than expected move by the ECB shows that central bank leaders are concerned about inflation trends in the eurozone at record levels, above 8.5 percent.

However, inflation is not such a problem in Japan. It was announced this morning that inflation in that country was 2.2 percent in June, meaning that the central bank can still pursue an extremely accommodative monetary policy.

Thanks to this, the Nikkei index has risen for the seventh consecutive day.

Support for the markets is also provided by yesterday’s rise in stock prices on Wall Street, for the third consecutive day. The Dow Jones strengthened by 0.51 percent, while the S&P 500 rose by 0.99, and the Nasdaq index by 1.36 percent.

The S&P 500 reached its highest level since June 9, thanks to better than expected earnings results from several companies.

Among the biggest winners was the technology sector, with Tesla’s stock price rising nearly 10 percent, as the electric vehicle manufacturer reported higher quarterly earnings than expected.

As a result, the Nasdaq index, which is full of tech stocks, saw the largest increase.

However, this morning, the Nasdaq futures are down about 0.7 percent as Snap’s stock price plummeted more than 25 percent after the tech company disappointed with its earnings results.

And while the results of most American companies are better than expected, the macroeconomic front is somewhat deteriorating. It was announced yesterday that the number of initial claims for unemployment benefits in the U.S. rose to 251,000 last week, the highest level in eight months.

Further slowing of U.S. economic growth is expected as the Fed is likely to aggressively raise key interest rates again this month due to high inflation, most likely by 0.75 percentage points.