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LGT Navigator: ECB faces difficult balancing act

July 20, 2022

Inflation in the eurozone rose again to a record level in June. Now investors are speculating that the European Central Bank could raise key interest rates by 50 basis points on Thursday. This also boosted the euro, which strengthened against the US dollar.

ECB

After a weak start to the week, US stock markets have rebounded on Tuesday. The S&P 500 climbed +2.8% and the Dow Jones gained +2.4%. The Nasdaq Composite even rose +3.1%. Better-than-expected corporate results contributed to the good mood. 

In Asia, stock markets follow the strong guidance from the US on Wednesday. In Tokyo, the Nikkei gains +2.5%. In Hong Kong, the Hang Seng Index advanced +1.6% and the Shanghai Composite gained +0.7%.

ECB faces a dilemma

The countdown to the European Central Bank's (ECB) monetary policy decision is on. Tomorrow, Thursday, the monetary authorities will meet, and it is considered certain that they will increase interest rates for the first time in eleven years. The question now is whether the ECB will hike rates by 25 or 50 basis points. Bloomberg reported on Tuesday that the central bank was considering an upward move of 50 basis points in view of high inflation, citing well-informed circles. Already last week, the central bank governors of various member countries have argued for a significant rate hike. 

So far, there has been a broad consensus in financial markets that the ECB will only raise key interest rates by 0.25 percentage points, and it remains to be seen whether the hawkish voices will prevail on Thursday. To be sure, prices in the euro area are currently rising faster than at any time since the currency area came into existence. Moreover, the ECB is lagging behind other major central banks, some of which initiated the interest rate turnaround months ago. But at the same time, the risk of a recession in the euro area is rising and is likely to be exacerbated if Russia cuts energy supplies. The International Monetary Fund (IMF) warns that such a scenario would threaten severe recessions, especially in Eastern Europe and Italy. It will therefore be crucial whether and to what extent Moscow will restart the Nord Stream 1 gas pipeline once the maintenance work currently underway is completed. If everything goes according to plan, the pipeline will again supply natural gas to Europe from Thursday. Investors are therefore anxiously waiting to see whether and how the ECB will succeed in this balancing act.

Meanwhile, the prospect of rising interest rates is supporting the euro. Against the US dollar, the common currency climbed on Tuesday to USD 1.0232 and thus increased in price by just under +1%. Last week, the euro was temporarily trading below parity to the US dollar.

Price growth in the eurozone accelerates

Inflation in the euro zone again reached a record level in June. Thus, consumer prices rose by +8.6% compared to the same month last year, as reported by the statistics office Eurostat on Tuesday. Thus, a first estimate was confirmed. In the previous month, inflation was +8.1%. The price increase was once again driven by rising energy prices, which have increased by more than 40% year-on-year. However, food and beverages also became significantly more expensive. If volatile energy and food prices are excluded, horseradish inflation came to +3.7%, after +3.8% in May.

France wants to nationalize power company

The French state wants to fully take over the national power company EDF for EUR 9.7 billion to ensure the expansion of nuclear power in the country. The government, which already holds about 84% of EFD, plans to offer EUR 12.00 per share, the Economy Ministry said on Tuesday. France is relying mainly on nuclear power to ensure energy security and reduce CO2 emissions. However, to be able to make this offer at all, the National Assembly must provide additional funding. For this, the government of President Emmanuel Macron is dependent on votes from the opposition. The parliamentary debate is scheduled for this week.

 

 

Economic Indicators July 20

MEZ Country Indicator Last period
08:00 UK Consumer price index (June, y/y) +9.1%
16:00 US Existing Home Sales (June, m/m) -3.4%

 

Earnings Calender July 20

Country Company Period
NL Akzo Nobel Q2
US Biogen Q2
CH Georg Fischer Q2
US Tesla Q2
CH Valora Q2

 

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Imprint
Publisher: LGT Bank (Switzerland) Ltd., Glärnischstrasse 36, CH-8027 Zurich
Editor: Alessandro Fezzi, E-Mail: lgt.navigator@lgt.com
Source: LGT Bank (Switzerland) Ltd.

 

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