European stocks rise before Fed as ECB works on crisis tool

ECB Governing Council says it’ll apply flexibility in reinvesting redemptions coming due in its pandemic portfolio.
Image: Alex Kraus/Bloomberg

European stocks rallied after their longest slump since March 2020 ahead of the Federal Reserve rates decision and as European Central Bank officials accelerated work on a new tool to combat unwarranted jumps in euro-area bond yields.

The Stoxx Europe 600 rose 1.3% by 1:45 p.m. in London. Italy’s FTSE MIB index pared gains to 2.5% after the ECB published the outcome of their emergency meeting, instructing committees to create a new instrument to tackle so-called fragmentation. Italian bonds and the euro also trimmed their advance as market participants said the statement failed to provide new details.

Following an emergency meeting Wednesday, convened after Italian yields surged to the highest since Europe’s sovereign-debt crisis, the ECB Governing Council also said it will apply flexibility in reinvesting redemptions coming due in its pandemic portfolio, with a view to preserving the functioning of the monetary policy transmission mechanism.

“Anyone hoping for detail on the anti-fragmentation side of the story is still left wanting. It’s been discussed – but there’s no detail in the release,” said Neil Campling, head of tech, media and telecom research at Mirabaud Securities.

The European equities benchmark has been hammered this year as worries of hawkish central banks and a potential recession dent demand for risk assets, despite stock valuations falling well below their long-term averages. However, the European stock market’s breadth — the number of shares participating in the latest drop — has yet to see signs of panic selling, especially compared with the last two dips in 2020 and March 2022.

European stocks came under pressure last week after the ECB committed to a quarter-point increase in interest rates next month and signaled a bigger hike in the fall. Belgium’s Pierre Wunsch had said earlier on Wednesday that the Governing Council is ready to step in if it considers moves in government bond markets to be unjustified.

Investors are “welcoming the fact the ECB is willing to keep stability in credit markets, ahead of withdrawing stimulus measures in the Euro area,” said Pierre Veyret. a technical analyst at ActivTrades. “The fact market drivers may already be changing is perceived as a major development for EU stock investors.”

In the US, the Federal Open Market Committee is expected to raise rates 75 basis points by Wall Street firms including Goldman Sachs Group Inc., JPMorgan Chase & Co. and Barclays Plc, who cite rising inflation expectations among Americans in looking for the largest increase in nearly three decades.

“75 basis points for sure is coming,” said Jun Bei Liu, a portfolio manager at Tribeca Investment Partners Pty Ltd. “You don’t want inflation to be built into the economy and then have secondary inflationary impact so go early, go hard and send the signal,” she said in an interview with Bloomberg Television, adding that a lot has already been priced into markets.

US retail sales fell in May for the first time in five months, data showed today.

Meanwhile, Credit Suisse Group AG strategists including Andrew Garthwaite cut European stocks to benchmark from small overweight as risks including hawkish central banks and the likelihood of a recession weigh on stocks. At the same time, Sanford C. Bernstein strategists said stock markets may have become too pessimistic about corporate earnings despite the gloomy outlook for the global economy.

“The rising yield environment will continue to put pressure on valuations,” said Roger Lee, head of UK strategy at Investec. “The only protection on a relative basis is in ‘value’ strategies which continue to outperform, namely natural resources, financials, especially banks, and defensive sectors.”

Among individual movers, Hennes & Mauritz AB fell as uncertainty about the margin outlook and ongoing cost pressures overshadowed the apparel retailer’s second-quarter sales beat. Meanwhile, Getinge AB tumbled 17% after the medical technology firm lowered guidance, projecting flat organic sales growth for the year.

© 2022 Bloomberg L.P.

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