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European and US stocks slid Thursday after the ECB and the Fed again hiked interest rates to fight elevated inflation, as worries about banks and recession continued to cloud sentiment. online news
The European Central Bank joined on Thursday the US Federal Reserve by increasing its main interest rate by a quarter percentage point, slowing the pace of its hike.
Like the Fed, which announced its decision on Wednesday, the ECB also dropped language from its statement a commitment to raise interest rates further at its next meeting.
ECB chief Christine Lagarde indicated however that the central bank has “more ground to cover” in fighting sky-high inflation, and said the change in guidance was not a signal of a pause in rate hikes.
“Based on the information today, we have more ground to cover and we’re not pausing,” she told a press conference.
The euro, which had fallen against the dollar following the initial announcement, briefly rebounded after Lagarde’s statement, but then fell further.
Berenberg bank economist Holger Schmieding said that the ECB, which started raising rates later than the US Fed, is likely to make two more quarter-point hikes in June and July.
European stocks ended the day lower, while Wall Street was down in late morning trade.
Briefing.com analyst Patrick O’Hare said equity markets were disappointed as they wanted to see the Fed pivot to rate cuts, not just a pause in rate hikes.
The market “wants such a pivot because it is worried that the Fed, and other central banks, are going to overtighten (or have overtightened already) and invite a dire economic outcome, particularly now that the banking crisis in the US is expected to lead to much tighter financial conditions through the restriction of credit,” he said.
Fresh banking fears
Fears of widespread banking turmoil were revived as shares in regional US lender PacWest plummeted by around 50 percent.
The selloff was apparently spurred by reports the bank was considering the possibility of a sale or other capital-raising measures in the wake of the recent collapses of other mid-size lenders.
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PacWest sought to reassure investors in a statement, insisting it had not “experienced out-of-the-ordinary deposit flows” since the banking fears first arose, and that its “cash and available liquidity remains solid”.
Shares in Western Alliance bank tumbled around 40 percent.
Oanda analyst Edward Moya said expectations remain high that there will be more bank failures with interest rates so high.
“Wall Street will pick on the banks that have too much of their total deposits being uninsured, which means more banks are at risk,” he said, adding that US politicians were unlikely to agree on fully insuring deposits, which was done exceptionally for SVB by regulators to forestall a panic.
Oil prices stabilised after having fallen sharply in recent days on expectations of weaker demand owing to an economic slowdown.
Also on investors’ minds were fears that Democrats and Republicans might fail to strike a deal on raising the US debt ceiling, triggering a damaging default as early as June 1.
Key figures around 1530 GMT
New York – Dow: DOWN 1.0 percent at 33,067.32 points
London – FTSE 100: DOWN 1.1 percent at 7,702.64
Frankfurt – DAX: DOWN 0.5 percent at 15,734.24
Paris – CAC 40: DOWN 0.9 percent at 7,340.77
EURO STOXX 50: DOWN 0.5 percent at 4,287.03
Hong Kong – Hang Seng Index: UP 1.3 percent at 19,948.73 (close)
Shanghai – Composite: UP 0.8 percent at 3,350.46 (close)
Tokyo – Nikkei 225: Closed for holiday
Euro/dollar: DOWN at $1.1002 from $1.1062 Wednesday
Pound/dollar: UP at $1.2568 from $1.2562
Dollar/yen: DOWN at 134.04 yen from 134.99 yen
Euro/pound: DOWN at 87.55 pence from 88.03 pence
West Texas Intermediate: DOWN 0.1 percent at $68.55 per barrel
Brent North Sea crude: UP 0.3 percent at $72.52 per barrel
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Notes from APS Radio News
From the early part of March 2020 to April 15, 2022, the US Federal Reserve had been increasing its holdings by nearly $5 trillion dollars.
It did this each month of that period by buying billions of dollars of corporation and government bonds, in effect, infusing massive amounts of money into the economy.
And, as the FRED graph shows, it did so at rapid rate or at a high rate of velocity.
Economists say that when massive amoutns of fiat money are infused into the economy at high rates of velocity, the likelihood of noticeably higher rates of inflation is made greater.
A number of other central banks followed a similar policy.
For example, between late February 2020, even days before the media started fixating on the virus thingy, and March of last year, the European Central Bank embarked on its own version of monetary expansion.
During that period, the ECB increased its holdings by over 5 trillion euros.
The Bank of Japan also increased its holdings.
Between February of 2020 and the early part of 2022, it had increased its holding by a few hundred trillion Yen.
For a number of years, including the Bank of Japan, major central banks have kept their interest rates low.
For its part, the Bank of Japan kept its interest rates at negative rates, meaning that depositors had to pay banks to hold their money.
During and before the pandemic, major corporations had increased the number of mergers and acquisitions, as those entities were able to make their purchases using inexpensive money and higher stock valuations.
The other part of the equation was that of supply.
As a result of lockdowns, many small and medium-sized businesses were closed.
Shipping ports had lost workers, and truck drivers going to those ports had to wait in long lines, as a result.
In effect, well before Russia’s invasion of Ukraine, shortages of various goods and services developed.
The invasion and sanctions imposed have aggravated shortages of commodities like petroleum and grain.
And there have been instances of price gouging.
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