Global shares and euro gain as ECB follows Fed with rate hike

World shares hit a 15-month high and the euro climbed on Thursday as the European Central Bank followed its US counterpart, the Federal Reserve, and delivered another widely-expected interest rate increase.

The ECB’s hike was its ninth in a row, but with investors sensing that the most aggressive rise in world borrowing costs in the last 40 years is finally cresting, MSCI’s 47-country ACWI stocks index scaled its highest level since April last year having surged 30% since November.

Investors are now waiting for Christine Lagarde’s news conference at 1245 GMT, which like the message from the Fed’s Jerome Powell on Wednesday, is expected to signal it will now watch where inflation goes.

The post-ECB reaction was muted after what had been a strong morning rally. On Friday, there is also the Bank of Japan meeting, where speculation has risen that it could begin shifting too.

The pan-European STOXX 600 index remained up 1.2%, Italian and Spanish stocks had hit their highest levels since 2008 and 2020 respectively, while the euro trimmed gains to 0.2% from 0.5%.

Clémence Dachicourt, senior portfolio manager at Morningstar Investment Management said the quarter point move by the ECB, which had taken its key deposit rate to 3.75%, had come as no surprise.

However, with economic data now pointing to a slowdown in the bloc’s economy, “This points towards the ECB nearing the end of its rate hiking cycle,” Dachicourt added. “The persistency in core inflation also tells us rate cuts are not on the agenda for now.”

Ahead of the start on Wall Street, Nasdaq futures advanced 1.4%, helped by a 6.8% jump in Meta Platforms in after-hours trading. Facebook’s parent company reported a strong rise in advertising revenue, topping Wall Street targets.

In Asia, MSCI’s broadest index of Asia-Pacific shares outside Japan had risen 1% to reach its highest level in five months.

Hong Kong’s Hang Seng index rallied, driven by a near 5% surge in Chinese property stocks as they extended a rebound started this week when a Politburo meeting fuelled hopes that more support to a battered sector is on the way. Japan’s Nikkei gained 0.7% to a three-week high.

Jens Eisenschmidt, chief European economist at Morgan Stanley, said the main question for the ECB now will be what it does in September. By that point it will have two more months of inflation data in the bag.

“I would be highly surprised if President (Christine) Lagarde says anything that brings market expectations much above 4%,” Eisenschmidt, said referring to the ECB’s maximum rate.

“Something that sees September either totally priced in or totally priced out is very unlikely.”

On Wednesday, the US Federal Reserve had delivered a quarter-point rate hike as widely expected. Chair Jerome Powell said at his news conference the Fed no longer expected a recession.

“Even though the Fed has left the door open for an additional rate hike before the end of the year, we believe that we’ve now reached peak cycle - the Fed tightening cycle is done,” said David Chao, a global market strategist at Invesco.

“We expect an increasing global risk appetite as markets continue to positively re-price recession risks, and ultimately look forward to and discount an economic recovery that could begin to unfold late this year.”

Futures only imply a slim chance - about 20% - that the US central bank could surprise with a quarter-point increase in September. They also moved to price in sizeable rate cuts of 125 basis points by the end of next year.

Markets also sense the end is also in sight for the ECB, with at most one more hike expected after this week.

However, the slow retreat in euro zone inflation could pile pressure on policymakers to keep going or at least keep rates higher for longer.

“The market is pricing in a peak rate of 3.96%. In our view a 50/50 chance of another hike will be closer to fair.” Jefferies economist, Mohit Kumar, said.

Another major event this week is the Bank of Japan meeting on Friday amid speculation of more tweaks to its ultra-loose monetary policy known as yield curve control, where its keeps market borrowing costs in a tight range.

The majority view is policymakers will not change that just yet, according to a Reuters poll, although some respondents do, including JPMorgan, which sees the key 10-year band being widened to +/- 100 basis points.

The yen climbed to as high as 139.35 per dollar but last hovered near the 140 level. Overnight, the dollar/yen implied volatility jumped to 36.3%, the highest since March.

The U.S. dollar continued to be pressured in Europe, off 0.2% against a basket of major currencies. Both the risk-sensitive Australian dollar and New Zealand dollar had been up as much 0.8%.

In the debt markets, euro zone government bond yields - a proxy for borrowing costs - were edging down again ahead of the ECB’s decision and the follow-up remarks.

Treasury yields were mostly steady too. The yield on the 10-year U.S. note held at 3.86%, after a drop of 6 basis points overnight, while the rate-sensitive two-year was little changed at 4.8329%, having also eased 7 bps.

Elsewhere, oil prices rose, with Brent crude futures up 0.6% at $83.41 per barrel and U.S. West Texas Intermediate crude futures up 0.85% at $79.46.