ECB’s Hawkish Comments
The window for a European Central Bank reversal following last week’s hawkish move looks to be shrinking, with hawks growing more confident by the day. Yields have returned to pre-pandemic levels, although Italian spreads have historically been significantly larger. The ECB claims to be unconcerned about this, but history shows that markets will swiftly widen spreads to put the ECB’s reasoning to the test.
At the ECB news conference, Christine Lagarde admitted that rates had risen, but she did not express her feelings on the matter. At the same time, she highlighted that “although yields have gone higher, spreads have not widened significantly.” Since then, 10-year Italian-German yield spreads have risen by 24 basis points to 1.65 per cent, which is high compared to current QE levels but well below where they have been in the past.
Markets tend to test what the ECB considers to be a high enough level of spreads. Christine Lagarde is also known for doing U-turns following comparable moments, such as when the pandemic hit in March 2020 and most recently when the market priced rate rises in late 2021. However, this time, the actions have been met with silence, perhaps attracting more shorts as the market tests the ECB reaction mechanism.
Oil prices plummeted as traders considered the dangers to the market’s recent gain, which included a potential de-escalation of tensions over Ukraine and the reopening of nuclear talks with Iran. Futures in New York fell by up to 2.5 per cent. French President Emmanuel Macron stated that he received assurances from his Russian counterpart Vladimir Putin that no “escalation” would occur. He didn’t go into detail. After Western governments warned of a possible invasion, oil and natural gas prices and several metals have risen in recent weeks as a result of the issue. Russia has categorically rejected any such plans.
Shares of Alibaba Group Holding Ltd. rose in Hong Kong after SoftBank Group Corp. stated it was not engaged in the Chinese internet giant’s registration of new American depositary shares. That statement eased investor concerns that the firm’s largest shareholder was attempting to cash out.
Alibaba shares fell earlier this week after the company filed with the Securities and Exchange Commission to register an extra one billion ADSs. Analysts speculated that SoftBank would try to sell some of its shares, mainly because it is perceived to require funds to support buybacks.