GLOBAL MARKETS-Rally splutters as Europe ploughs on with rate hikes

·4 min read


European shares dip as UK, Switzerland and Norway hike rates


Dollar stuck near 7-week low after mixed Fed message


Oil prices slip in commodity markets

By Marc Jones

LONDON, March 23 (Reuters) - Europe's post-Credit Suisse rebound spluttered to a halt on Thursday as Switzerland, Norway and Britain all showed the year-long cycle of sharp interest rate rises was by no means over.

Markets had seemed relieved when the Federal Reserve hinted at a pause after its latest quarter-point rise on Wednesday, so the sight of Switzerland's SNB jacking up rates despite its torrid week and the Bank of England hoisting borrowing costs after a nasty inflation surprise were reminders not to get carried away.

The European-wide STOXX 600 share index spent the morning down 0.7% with the banking sector the main culprit again, suffering a near 2% drop. Norway had also hiked rates, although MSCI's main world share index was still in positive territory after overnight gains in Asia.

"The measures announced at the weekend ... have put a halt to the crisis," the SNB had said, referring to Credit Suisse's shotgun marriage with UBS, a view also voiced by Germany's powerful Bundesbank chief.

Focus then shifted to the Bank of England, as it raised UK rates by another quarter-percentage-point, a move that had been widely expected after a surprise jump in inflation earlier in the week had largely squashed any hopes of a pause.

The pound barely budged, having already added to its near 5% rally over the last fortnight with a 0.3% morning rise to $1.2315.

John Leiper, Titan Asset Management's Chief Investment Officer, said the BoE's hike came as no surprise following Wednesday's painful inflation data.

"We think there is more to come," he added, although he cautioned the result could be a recession.

There was little resistance to the pound's rise from the dollar either, which was still licking its wounds having hit a 7-week low after the Fed's meeting.

Fed chief Jerome Powell had said that, while inflation remained a problem, the current stresses in the banking sector could have a significant impact on the U.S. economy, thereby reducing the need for rate rises.

Germany's hawkish European Central Bank rate setter, Joachim Nagel, had even said he now thought euro zone rates were "approaching restrictive territory", referring to a level that curtails growth.

"I do not know when we will more or less be there," he had said at an evening event in London on Wednesday. "But what I know is that when we are there we have to stay there and not come down too early."

Both the euro and yen remained up on the day, as did the Swiss franc after the SNB's half-point hike.


Despite Europe's travails, futures markets pointed to a bounce from Wall Street later.

The main S&P 500, Dow Jones and Nasdaq bourses had ended lower on Wednesday, with the Fed move offset by U.S. Treasury Secretary Janet Yellen telling lawmakers that she had not considered or discussed creating "blanket insurance" for U.S. banking deposits without approval from Congress.

Markets are now pricing in an approximately 65% chance of the Fed pausing at its next meeting, in May, and a 35% chance of a 25-bps-rise.

For bond markets it meant European government bond yields - which reflect borrowing costs - were heading down again. German Bunds were back at 2.25%, having seen 10-year U.S. Treasury yields dip back below 3.5%.

Among commodities Brent oil, which has fallen nearly 9% this month, slipped another 0.3% to $76.04 a barrel. Gold, which is up more than 8% for March, was fractionally higher on the day at $1,975 an ounce.

"The thought of peak U.S. rates being within reach is bolstering (gold) prices," said Han Tan, chief market analyst at Exinity.

"As long as market expectations for a 2023 rate cut remain intact, gold may well revisit the psychologically-important $2,000 mark."

(Reporting by Marc Jones Editing by Mark Heinrich and Alex Richardson)