WeeklyWatch – ECB hikes rates amid market growth

26 July 2022

Stock Take

High expectations

Broadly speaking, equities were buoyant last week, even amid the European Central Bank’s 0.5% interest rate rise – its first upwards move in over 11 years.

The base rate has been sub-zero since 2014, and now stands at 0.00%. It is expected that further increases will be made over the months to come, as the bank does its best to tackle soaring inflation.

Sky-high food and energy costs meant that consumer prices rose 8.6% in June, year on year – the highest figure recorded to date.

The announcement of interest rate hikes by central banks earlier this year saw a negative response from markets. However, last week, the MSCI Europe Ex. UK closed up 3%, with a similar story from the German DAX Performance and France CAC 40 indexes.

Azad Zangana, Senior European Economist and Strategist at Schroders, proposed that this market response could be because the changes were both expected and needed.

“The ECB should continue to raise interest rates at a steady and accelerated pace to reduce the risk inflation becoming entrenched. The Schroders forecast has the main refinancing interest rate reaching 1% by the end of this year, but it now appears that a target of 1.5% may be more appropriate.”

In the US, the S&P 500 went up by 2.6%, with the technology-heavy NASDAQ rounding off the week 3.3% higher.

Zahra Ward-Murphy, from Absolute Strategy Research Equities, suggested that equities might be bouncing as investors are, perhaps, more likely to believe that much of the negative news is already priced into the market, following a large correction over the course of H1 this year.

“Those taking this view were encouraged last week by a fund manager survey highlighting the significant extent to which investors had reduced risk and equity positions vs cash.”

Another potential driver behind this improved performance is that some are anticipating that central banks will have to reduce rate-rise plans as the economy slows.

This particular theory is set to be tested later this week, given that the US Federal Reserve is expected to increase its central interest rate by 0.75%, after US inflation reached 9.1%.

Fiscal fight

In the UK, meanwhile, as the combat for Boris Johnson’s successor played out – with Rishi Sunak and Liz Truss being the final two contenders – the FTSE 100 rose 1.6%. The two candidates have thus far been promoting two outlined conflicting fiscal policies, with Sunak declaring he would wait until inflation falls before cutting taxes, whereas Truss speaks of cutting taxes quickly.

Ruth Gregory, Senior UK Economist at Capital Economics, argues:

“What will really matter is the economic backdrop when the new PM walks into No. 10 Downing Street on 6th September (the winner of the poll of Conservative Party members will be declared on 5th September). We suspect that by the time the new PM takes office, the economy will be in a recession. That will make it very hard for even the more fiscally restrained Rishi Sunak to resist loosening fiscal policy.”

Delicate balance

Central banks are trying to finely balance raising interest rates just enough to bring down inflation, but not so much as to trigger a recession. Yet with economic growth slowing in many markets, many believe some form of recession is likely this year.

Tom Beal, CIO of St. James’s Place, highlights that stock markets don’t always fall in recessions.

“A lot of that pain in markets is exhibited before you get into that recessionary period. So while it looks like we might be entering a recession from here, it doesn’t necessarily mean markets are going to fall.”

With one eye on the horizon, Kristina Hooper, Chief Global Market Strategist from Invesco, noted:

“Stocks have been beaten down. That doesn’t mean we won’t see more downside for some stock markets around the world, especially given that earnings expectations are likely to be adjusted downward. But I believe we are far closer to the bottom than the top — and meaningful positive catalysts could present themselves in coming months.”

Wealth Check

When you’re contemplating your future and how to best manage your money, it’s important to make sure you have financial security in later life, when you no longer have an income. If you’re wondering if it’s ever too late to start saving, the answer is no.

The importance of saving for retirement

The face of retirement has markedly changed from what it was for previous generations.

The average person used to dedicate 30 years of their career to one profession – often with one or two employers – and would stop working altogether on reaching retirement age, which was usually around 60 to 65 years old. Nowadays, with life expectancy being that much higher, it’s vital to plan how you’ll fund your later years.

How much money is needed for retirement?

How much money you’ll need before you give up work all depends on what you wish to do.

Many individuals fund their retirement from a range of sources, such as via property, ISAs, earnings, and pensions. The advantage to this is that money can be withdrawn from each of these in different ways.

For instance, ISA savings can often be withdrawn tax-free on demand (depending on the type of ISA); pensions enable people to withdraw a tax-free lump sum at retirement age; and income from a rental property may be monthly.

Devising a plan

Simply having savings isn’t enough – you also need a plan, which is where the beauty of financial advice comes in.

It’s wise to maintain regular contact with your financial adviser, so they can take a holistic view of your situation and support you in managing your ambitions for retirement, and what you can do to make these dreams a reality.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and the value may fall as well as rise. You may get back less than the amount invested.

The levels and bases of taxation and reliefs from taxation can change at any time and are generally dependent on individual circumstances.

In the Picture


Past performance is not indicative of future performance. The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and the value may fall as well as rise. You may get back less than the amount invested.

The Last Word

“Hasta la vista, baby.”

Boris Johnson says goodbye at the end of his final Prime Minister’s Questions.

The information contained is correct as at the date of the article.

Invesco and Schroders are fund managers for St. James’s Place.

The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.

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