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European Stock Exchanges | Central banks’ remedies for inflation scare the markets

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(Paris) Stock markets fell on Thursday after central bank decisions announced in the past 24 hours, all insisting on continuing to fight inflation despite the ever-growing shadow of recession.

The European markets fell back very strongly: Paris dropped 3.10%, Frankfurt 3.07% and Milan 2.95% around 9:55 a.m. (Eastern time). London fell more modestly (-0.95%).

Plunging 3%, the pan-European Eurostoxx 50 index was heading for its worst session since early June.

Wall Street also continued in the red after disappointing indicators: the Dow Jones fell by 1.74%, the S&P 500 1.84%, the NASDAQ by 2.06%.

Last of a long series, the European Central Bank did not innovate compared to other central banks and continued to increase its key rates, but in a more modest way than at its previous meetings (0.5 percentage point ).

However, the institution’s forecasts on its next decisions are very restrictive (“hawkish”), noted Frederik Ducrozet, economist at Pictet.

During her press conference, Christine Lagarde said in particular that the ECB would proceed to increases of 0.50 percentage point “for a while” and that rates would rise above the latest market expectations.

Eurozone inflation forecasts for 2023 and 2024 have also been raised. Even in 2025, the pace of inflation is expected to remain slightly above its 2% target.

As a result, it will reduce from March 2023 its portfolio of debt accumulated during the crisis years.

This news pushed up rates on the bond market: the cost of the Italian 10-year loan rose to 4.13%, against 3.85% the day before. The gap widened with the German 10-year debt rate, the benchmark in Europe, which reached 2.08%.

On Wednesday, the US Federal Reserve set the tone: it admittedly reduced the pace of its monetary tightening as expected on Wednesday, but indicated that it now expected its main key interest rate to exceed 5% next year, a higher level than previously indicated.

The institution was more pessimistic about the evolution of the rise in prices next year, on unemployment and on the growth of the world’s largest economy.

“The Fed is not yet convinced that inflation is on a sustainable downward trajectory,” summarizes Christian Scherrmann, from DWS.

On Thursday, the central banks of England, Switzerland and Norway also issued a similar message.

The evolution of monetary policies is all the more worrying as investors fear that high interest rates will push the global economy into recession.

The manufacturing activity index for the New York area in the northeastern United States fell back into the red in December, after rebounding in November, as companies braced for an economic slowdown next year , even a recession. That of the highly industrialized region of Philadelphia, in the United States, remained in contraction in December for the fourth month.

In Asia, the stock markets also took a hit after the drop in retail sales in China in November, which was more severe than expected (-5.9% over one year).

Technology and luxury suffer

Growth stocks, whose valuations are influenced by financing conditions, plunged after central bank meetings.

This is the case for technology, with declines of 4.75% for the semiconductor manufacturer STMicroelectronics, 3.78% for Meta (Facebook), 3.35% for software specialist SAP.

Another sector, luxury, also fell sharply, notably Kering (-5.75%), Hermès (-5.70%) in Paris or Moncler (-4.19%) in Milan.

Euro hits six-month high

In sharp decline at the start of the session, after the Fed’s resolution, the euro rose thanks to the press conference by Christine Lagarde, President of the ECB: around 9:50 a.m. (Eastern time), it took 0.19% to $1.0701, its highest level since early June.

Oil fell a little after its strong gains since the start of the week: the barrel of American WTI yielded 0.91% to 76.58 dollars and the barrel of Brent from the North Sea 0.42% to 82.33 dollars around 9:50 a.m. (Eastern time).



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