Stocks slide amid weak earnings and more tightening

European stock markets are coming under pressure on Thursday, with the moves being exacerbated by the realisation that rate hikes may come earlier and faster than thought.

Equity markets were already under a little pressure today, as earnings from Meta and Spotify brought investors back down to earth with a bang. Results from Microsoft, Apple and Alphabet had been far more encouraging and it seemed that the worst could be over for big tech. Today’s sell-off suggests we’re not out of the woods yet.

The spotlight was always going to be on the BoE and ECB today to see whether more aggressive tightening was going to be warranted to get to grips with inflation. The BoE had already started raising rates and indicated more will come this year while the ECB has repeatedly pushed back.

With the ECB appearing to have become the latest to buckle and abandon its commitment to its previously held transitory beliefs, yields are spiking and that’s weighing heavily on stock markets in the region. The question now is how far expectations will go as they may have a lot of catching up to do.

Mixed messages from the BoE

The Bank of England appeared to tick all the boxes but not in a particularly helpful manner on Thursday. The central bank raised interest rates by 0.25%, in line with expectations, while four of the nine MPC members – a very large minority – preferred a 0.5% hike and Governor Bailey later indicated that market expectations were too aggressive. So an outcome that kind of appeals to everyone but satisfies no one.

On top of that, the Bank announced that it will start reducing the size of the balance sheet through non-reinvestment of maturing assets and active sales of corporate bonds. Gilts will only be considered for active selling once the bank rate hits 1%, which markets still believe will happen much earlier than the BoE is trying to suggest.

Clearly, there are wide-ranging opinions on the MPC which is contributing to what appears to be a gulf between the BoE and markets rate expectations this year. Recent history has been on the side of the latter which is pricing in another rate hike at each of the next two meetings. There was plenty of volatility in the pound since the initial announcement, as you can imagine, with the currency starting to settle a little higher.

ECB buckles under inflationary pressure

The ECB avoided doing anything radical today but not-so-subtle tweaks in the statement and Lagarde’s responses in the press conference made clear that the central bank no longer thinks a rate hike is unlikely this year. It was always unlikely that we were going to see a dramatic shift in the absence of new economic projections but it’s clear after today that we will see something along those lines next month.

Once again, it seems that the market is ahead of the curve and the central bank is chasing behind. And based on current market rates, the ECB will have some serious catching up to do. This may change, if as many expect inflation peaks over the next few months and we see evidence of pressures easing, which will allow central banks to proceed as they wish. But recent history hasn’t favoured listening to what policymakers are saying so perhaps we should strap ourselves in for a turbulent year and a lot more tightening.

The euro is performing very well on the day, on the back of Lagarde’s press conference, and the clear message that rate increases this year are no longer off the table. With three or four 10 basis point hikes now heavily priced in by the end of the year, the currency could remain in favour as we adjust to something we haven’t experienced in a decade; interest rate hikes in the eurozone.

Bitcoin slips again in risk-off markets

Bitcoin is also not faring well in the monetary tightening environment although it’s the impact it’s having on broader risk appetite that’s probably the most damaging aspect of that. It’s around 1% lower on the day, having pulled further back from USD 40,000 on Wednesday, where it was briefly threatening to break back above earlier this week. We could see it consolidate in this region in the near term, with a significant break of USD 30,000 potentially triggering another aggressive move lower.

For a look at all of today’s economic events, check out our economic calendar: www.marketpulse.com/economic-events/

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