The ECB's emergency meeting, just before the Fed, sends European stock markets up

The ECB’s emergency meeting, just before the Fed, sends European stock markets up

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[Article mis à jour à 13h28 avec la réaction de Bruno Le Maire]

What does the European Central Bank intend to decide in a context of soaring inflation and tougher financing conditions for sovereign debt in the euro zone? The ECB is holding an exceptional meeting this Wednesday morning, the day when the markets are expecting a spectacular rate hike by the Fed, and a week after announcing a tightening of its monetary policy to combat the inflation which has been accompanied a widening gap in borrowing costs between the States of the euro zone.

Containing the risk of fragmentation in the sovereign debt market

“The Board of Governors will hold an ad hoc meeting on Wednesday to discuss current market conditions”, an ECB spokesman told AFP. ECB officials have already hammered home their readiness to act urgently if the risk of fragmentation in the sovereign debt market increases, but many observers have bemoaned the lack of a concrete solution presented by the institution.

“There is no doubt that, if and when necessary, we can and will design and deploy new instruments to ensure the transmission of monetary policy and therefore our primary mandate of price stability,” declared on Wednesday Isabel Schnabel, member of the executive board of the ECBin a speech given in Paris.

The announcement of such a meeting caused the Minister for the Economy and Finance, Bruno Le Maire, to react. The government’s number two demands that the change in European monetary policy be made “gradually and in advance. (…) We don’t want brutality, we don’t want a decision that could take economic players by surprise and which ultimately would create more economic difficulties than anything else”said the minister who was speaking on the sidelines of the Vivatech show in Paris.

Before imagining a new monetary support tool, as it did during the sovereign debt crisis or the pandemic, the ECB can act to contain the spreads by calibrating the reinvestment of maturing bonds in its huge portfolio of assets acquired in recent years, recalled Ms. Schnabel.

Since the announcement of monetary tightening by the ECB, interest rates on government bonds have soared in the euro zone. Above all, the rates on the public debts of the so-called “peripheral” countries, considered to be more fragile, have increased much more than the German rates. The yield on the Italian loan exceeded 4% on Monday, a level dating back to the end of 2013. The difference between the 10-year rate of Germany, which is a reference, and that of Italy reached its highest levels since May 2020 and the first wave of Covid (although it is still far from those reached during the eurozone debt crisis).

Relaxation in the sovereign debt market and jump in European stock markets

But on Wednesday morning, after the surprise announcement of an exceptional meeting of the European Central Bank, the sovereign debt market relaxed frankly: around 07:45 GMT, the Italian yield with a 10-year maturity (at 3.93%) fell back below the 4% threshold, a level crossed on Monday and dating back to the end of 2013.

Wednesday’s surprise ECB meeting comes the same day as another highly scrutinized decision by the US Federal Reserve. The Fed is due to announce on Wednesday a new rate hike that could be stronger than expected, in a context of rising prices that continues to accelerate sharply despite already two rate hikes since last March.

Rate hike: The Fed could hit very hard this time around

Eurostoxx 50, Euronext 100, FTSE 100, CAC 40, DAX, SBF120, BEL 20… European indices opened sharply higher on Wednesday after the announcement of an exceptional meeting in the morning of the central bank of the euro zone , exposed to a risk of financial fragmentation, and before the verdict in the evening of the American Federal Reserve (Fed) on its monetary tightening.

At 9 a.m., the Paris Stock Exchange rebounded by 1.22% and that of Frankfurt by 1.32% after six consecutive sessions of decline. London recovered 0.65% shortly after opening.

(with AFP)