Stocks in Europe took the latest European Central Bank interest rate decision in their stride on Thursday, though to varying degrees, as the FTSE 100 underperformed.
The ECB lifted rates by 25 basis points, taking the interest rate on the main refinancing operations, the marginal lending facility, and the deposit facility to 4.25%, 4.50% and 3.75%, respectively.
It means the Frankfurt-based central bank has hiked its policy rates by a cumulative 425 basis points during the current tightening cycle. But what it does next is not clear, with a pause now an option for September.
Holding back London’s large-cap index was a slide for Barclays amid a net interest margin outlook cut. NatWest surrendered more ground as the boss of its Coutts unit has departed. Away from banking, Centrica shone, meanwhile.
The FTSE 100 index rose 15.87 points, 0.2% at 7,692.76. The FTSE 250 added 86.83 points, 0.5%, at 19,273.37, and the AIM All-Share climbed 3.14 points, 0.4%, at 769.29.
The Cboe UK 100 added 0.3% to 768.13, the Cboe UK 250 rose 0.6% to 16,940.19, and the Cboe Small Companies rose 0.4% at 13,803.84.
It was a more convincing day for mainland European equities, with the CAC 40 in Paris jumping 2.1%, while the DAX 40 in Frankfurt surged 1.7%.
Luxury retail boosted the CAC, as did well-received results from semiconductor manufacturer STMicroelectronics. The DAX got support as Mercedes shares motored higher on a guidance boost.
Stocks in New York were on the up. The Dow Jones Industrial Average up 0.1%, the S&P 500 rose 0.6% and the Nasdaq Composite surged 1.2%.
Sterling was quoted at $1.2865 late Thursday, lower than $1.2931 at the London equities close on Wednesday. The euro traded at $1.0996, tumbling from $1.1074. Against the yen, the dollar was quoted at JP¥141.07, up versus JP¥140.33.
Better-than-expected US data boosted the dollar. Quarter-on-quarter gross domestic product in the US increased 2.4% on an annualised basis in the second quarter of the year. In the first quarter, real GDP increased 2.0%, showing that the US economy has gathered some momentum.
The European Central Bank ruled out a rate cut in the near-future, but suggested on Thursday that a pause could be in its thinking, after saying one did not even cross its mind at the last meeting.
The ECB affirmed its ‘data dependent approach’ to future decision, but President Christine Lagarde’s language around the prospect of a pause changed markedly since the June meeting.
‘We are moving to a stage where we are going to be data dependent. We will take the new projections by staff, we’re going to take two new readings, we’re going to take more information about how transmission [of rate hikes] is taking place, on the basis of that, we will determine whether we hike or pause,’ ECB President Lagarde told reporters in press conference following the central bank’s policy decision.
It represents somewhat of an about-turn by Lagarde, who back in June said the ECB was not considering a pause.
‘In terms of having to pause or to skip, we have not discussed it at all. We have not begun thinking about it because we have work to do,’ she said at the previous meeting’s press conference.
Absent this time around was an assertion that the ECB ‘still has more ground to cover’, a line Lagarde has often used in recent meetings.
‘We are not in the domain of forward guidance. We are rooted in our determination to break the back of inflation and to take inflation back to 2% in the medium-term on a sustainable basis,’ Lagarde said Thursday.
The ECB’s hike follows one from the Federal Reserve on Wednesday. The Bank of Japan is unlikely to make it a rate hike hat-trick during a week of central banking decisions, following the lifts from the ECB and the Federal Reserve, though it is not out of question that the BoJ alters its yield curve control policy on Friday.
Stock markets have responded well to the Fed and ECB decisions.
Missing out on the rally, were banking shares in Europe, however. In one of the larger surprises from Thursday’s monetary policy statement was the decision by the ECB to set the remuneration of minimum reserves at 0%, instead of at the deposit facility rate. The rate is the interest the ECB pays to lenders who stow away money at the central bank.
It may result in a profit hit for bank firms, though it will ‘will reduce the ECB’s net interest expenditure’, according to Capital Economics analyst Andrew Kenningham.
In Frankfurt, Deutsche Bank shares fell 3.3%, while Commerzbank lost 1.1%.
In London, Barclays was among the worst large-cap performers. One of the more bearish elements of its half-year results was a cut to net interest margin guidance, now expected to be ‘less than 3.20%, with a current view of around 3.15%’.
It had previously expected an NIM of 3.20%. Barclays shares fell 5.1%
The scandal surrounding NatWest’s Coutts claimed another victim. Coutts boss Peter Flavel, will step down immediately.
It follows the resignation of NatWest’s chief executive Alison Rose in the early hours of Wednesday.
Its interim boss, Paul Thwaite, said the resignation was agreed by mutual consent and is the ‘right decision for Coutts and the wider group’.
Flavel is expected to be replaced by Mohammad Kamal Syed, who is currently the head of asset management at the bank, on an interim basis until a permanent successor is found.
The high-net-worth bank has been at the centre of a row sparked by former Ukip leader Nigel Farage, after he said his account was shut down because it did not agree with his political views.
NatWest fell 1.0%.
British Gas owner Centrica topped the FTSE 100, rising 7.3%. It swung to a pretax profit of £6.42 billion from a pretax loss of £1.18 billion a year prior. This was partly driven by a 44% reduction in the cost of sales to £5.10 billion. Net finance costs also fell by 54% to £36 million.
Elsewhere, Mobico fell by 10%. The Birmingham-based public transport provider, formerly known as National Express Group PLC, swung to a pretax loss of £23.4 million from a profit of £20.5 million a year earlier.
Revenue was up 19% to £1.57 billion from £1.32 billion, but this was offset by operating costs rising 22% to £1.56 billion from $1.28 billion. Furthermore, finance costs rose 47% to £33.8 million from £23.0 million.
Electric vehicle charging infrastructure provider Pod Point plunged 31% as it lowered guidance following as a ‘detailed review of the group’s operations’ is being undertaken.
‘While this work is ongoing, it has become clear that the outcome for the financial year ending 31 December 2023 will be materially different from the current guidance,’ Pod Point said, predicting lower revenue and chunkier adjusted earnings before interest, tax, depreciation and amortisation loss.
It expects revenue of ‘at least £60 million’, the guidance knocked from a range of £85 million to £90 million, and an adjusted Ebitda loss ‘no greater than £17 million’. It had previously expected ‘losses in the mid-single digits millions’.
Gold was quoted at $1,944.93 an ounce late Thursday, falling from $1,974.44 on Wednesday. Brent oil was trading at $83.59 a barrel, higher than $83.16.
Friday’s economic calendar has the BoJ decision in the early hours, before a German GDP reading at 0900 BST and an inflation reading from the eurozone’s largest economy at 1300 BST. There is a US personal consumption expenditures reading at 1330 BST.
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