European stock markets were lower across the board on Thursday after the Federal Reserve approved its third consecutive interest-rate rise of 0.75 percentage point and signaled additional large increases were likely even though they are raising the risk of recession.
Switzerland and Norway followed the U.S. in raising rates on Thursday, with the U.K.’s latest policy decision due at 1100 GMT. The Bank of England is expected to announce an increase of at least 50 basis points.
“In our view, the BOE will raise its policy rate by ‘only’ 50bp, as it weighs in a looming recession against still high inflation,” Danske Bank said. “However, we recognize it’s a close call between 50bp and 75bp.”
Read: UK Is Poorly Positioned to Cope With Rising Interest Rates
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Berenberg said Schneider Electric’s bid valuation doesn’t reflect Aveva’s true potential and is lower than analysts expected, as it cut its rating on the U.K. stock to hold from buy but raised its target price to 3,113 pence from 2,800 pence, based on the bid.
Still it is likely that shareholders will opt to cash in and give up on future upside potential and risks given the current level of shareholder fatigue, Berenberg said. This stems from the material derating of the share price in the past 12 months, as well as a potential re-rating from successful business model transitions likely taking as long as two years.
Stock futures edged higher following Wednesday’s steep post-Fed losses, while Treasury yields climbed, with the 2-year reaching 4.088% and the 10-year at 3.520%.
The Fed’s decision to raise the federal-funds rate by 0.75 percentage point will bring the central bank’s benchmark rate to a range of 3% to 3.25%, its highest level since 2008.
Based on the Fed’s so-called dot plot, or projection of where interest rates might be in the coming years, investors now expect the central bank to ultimately raise rates above 4% in order to tame inflation.
That is far above what most had anticipated just a few months ago-and likely to keep pressure on markets, which have already been pummeled this year by tightening monetary policy and high inflation.
The dollar hit multi-year highs against a basket of currencies after the Fed’s rate rise, but more importantly, policymakers projected further significant rises, with nearly all of them forecasting rates to rise to 4%-4.5% by the end of this year.
“Expect the dollar to remain bid on dips as confidence grows that deposit rates for the world’s most liquid currency will push above 4% over the coming months,” ING said.
MUFG said the dollar is on course to rise further.
“This is frontloading like we have never seen before and gave a very strong signal of the Fed’s determination to get to a restrictive level of monetary policy as soon as possible.”
Momentum remains “clearly in favour of the dollar” while the S&P 500 stock index is likely to break below the June low “over the coming days or weeks,” MUFG said.
Sterling gained ahead of the Bank of England’s policy decision at 1100 GMT, but it is still at risk of falling in the wake of this decision, ING said.
The BOE’s policy tightening has provided little support to sterling this summer and instead, U.K. fiscal concern is growing. Friday’s government mini-budget “could prove the trigger for another round of gilt and sterling selling.”
ING said GBP/USD could fall towards 1.10 and EUR/GBP could rise to around 0.88.
The Norwegian krone extended losses after the Norges Bank raised its key policy rate by 50 basis points to 2.25% and signalled more gradual rate rises at upcoming meetings. The rate rise was in line with market expectations.
Norway’s central bank said monetary policy is starting to have a tightening effect on the Norwegian economy, which may suggest a “more gradual approach to policy rate setting ahead.”
It sees the policy rate reaching 3% over the course of winter.
Read: Norges Bank Isn’t Finished Tightening Yet
Read more on the Norges Bank rate rise here.
European government bond yields pushed higher in reaction to the as-expected Fed rate rise, RBC Capital Markets said, with comments by the ECB’s Isabel Schnabel adding to the upward trend.
“The FOMC meeting was generally interpreted on the hawkish side despite the expected 75bp of rate [increase] being delivered,” RBC said.
In an interview, published on the ECB’s website, Schnabel said the ECB’s Governing Council will continue to increase interest rates at the October meeting, although she didn’t say how big this rise will be.
With recession risks in the U.S. edging higher, Insight Investment has forecast the 10-year Treasury yield at 3.6% in a year’s time and expects the yield curve to remain inverted.
The more hawkish the Fed gets, the more market volatility is likely to be elevated, and the risk of a recession ticks higher, it said.
Insight Investment expects the Fed to slow down its pace of interest rate rises into 2023, as rates are now above the Fed’s estimate of “neutral,” implying that smaller rises will have a bigger impact.
Oil futures rose more than 1% after settling at their lowest level in two weeks on Wednesday, although prices are likely to remain under pressure on fears of even tighter supply ahead of the winter.
TD Securities said there’s also been a repricing of Russian risk.
The energy market’s narrative is turning back toward structural tightness as the market reprices war risks with the Northern Hemisphere winter looming on the horizon, TD said.
Read Barrons.com: Europe’s Move to Shore Up Gas Supply Helped Ease Prices. That Could Provide an Opportunity for Investors.
Higher recycling rates of copper scrap and secondary material are going to be needed to fulfill demand, according to Inka Guixa, chief executive of Spanish copper company La Farga.
“The challenge for the copper sector is that the amount of copper is increasing and there will be a lot of demand,” Guixa said during the Fastmarkets’ Copper Conference in Barcelona.
“We need to fulfill that demand, so we have increased capacity. Increasing recovery from end of life will be beneficial for the whole sector, [the question] is just how we do this across the value chain.”
Guixa called for further technological developments in recovery rates from copper products at the end of their lives so that more secondary material reenters the market.
Read: European Copper Sentiment Weakening Faster Than Macro Indicators
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Swiss National Bank Raises Interest Rates by 75 Basis Points
Switzerland’s National Bank on Thursday raised interest rates for the second time in as many meetings, catching up with other central banks as the country faces the highest inflation rate in three decades.
The Swiss central bank increased its policy rate by 75 basis points to 0.5%. The move is larger than the one in June, when the bank rose rates by half a percentage point.
Europe’s Move to Shore Up Its Gas Supply Helped Ease Prices. That Could Provide an Opportunity for Investors.
Natural-gas prices have seen a steep decline from their peak last month, likely providing an opportunity for investors ahead of the winter heating season.
“The market has greater confidence that Europe will have sufficient gas supplies to get through winter without running out of gas,” says Rodney Clayton, portfolio manager for the Virtus Duff & Phelps Select MLP and Energy fund (VLPIX).
Airbus Backs 2025 Production Target Despite Supply-Chain Snarls
Airbus SE still aims to increase its production rate of narrow-body planes to 75 a month in 2025 despite the difficulties it faces in securing enough engines and other components from its suppliers.
The European plane maker’s target for its A320 family of aircraft remains unchanged, and takes into account its assessment of the readiness of its supply chain, a company spokesman said Thursday.