Invesco: Market quickly recovers from ECB shock

Invesco: Market quickly recovers from ECB shock

July 21, 2022

Interest Rates ECB
Geld euro ECB

Paul Jackson, Global Head of Asset Allocation Research at Invesco, comments on today's decision by the ECB governing council to increase policy rates by 50 basis points (bps):

'It also announced its plan to ensure stability in government bond markets. Market reaction was initially as might be expected with the euro gaining against the US dollar and bond yields rising across the eurozone. However, much of those gains have subsequently been surrendered. The confirmation of the TPI initially seemed to have limited the rise in peripheral yields, though again the effect seems to have been short lived (perhaps because fiscal soundness was outlined during the press conference as a precondition for the crisis tool). More interesting was the stock market reaction, with the Euro Stoxx 50 initially giving up ground but then recovering to approach the day’s highs, only to fall back to where it started. 

The backdrop to these announcements was difficult with today’s resignation of Mario Draghi as Prime-Minister of Italy creating political uncertainty in the largest peripheral economy (and causing a pre-ECB announcement widening of spreads between Italian and German yields). Also, the partial reopening of gas flows through the Nord Stream 1 gas pipeline from Russia is a reminder of how vulnerable Europe could be to an interruption of gas flows over the coming months (22.5% of Europe’s primary energy came from Russia in 2020). The ECB is only just embarking upon a tightening process while weighing up the dual risk of inflation and recession. This will be a difficult path to navigate and we suspect financial markets could remain volatile.'

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