By Farah Elbahrawy
June 15, 2022
European stocks rallied after posting the longest slump since March 2020 as the European Central Bank announced an emergency meeting “to discuss current market conditions” and ahead of the Federal Reserve rates decision.
The Stoxx Europe 600 rose 0.9% by 8:03 a.m. in London. Italy’s FTSE MIB index was up 2.3% led by banks, while Italian bonds surged and the euro rose, amid speculation the ECB could give details on how they plan to keep bond yields of the region’s most vulnerable members in check as they wind back stimulus. The ECB meeting comes after the yield on Italy’s 10-year debt rose above 4% for the first time since 2014 this week.
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.
“There is a risk that the governing council come out and just give more details with what they intend to do with PEPP re-investments,” instead of announcing a new program which would be a disappointing outcome, said Sarah Hewin, head of Europe and Americas research at Standard Chartered Plc. “Let’s see they might surprise us with a new bond buying package.”
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.
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.
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.
“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.”
— With assistance by Michael Msika, Kat Van Hoof, and Allegra Catelli