Swissquote: ECB’s deposit rate 4%

Swissquote: ECB’s deposit rate 4%

Europa (02) omhoog

Many European 10-year yields now at highest levels in over a decade.

'Inflation in Europe took the wrong direction in February. Data released yesterday shows a record inflation of 7.2% in France and higher then a expected 6.1% in Spain. For the first time, the market pricing pointed out that the ECB’s deposit rate would reach 4%, 150bp higher than where it stands right now. That means more 50bp hikes will be on the menu, after the next ECB meeting’s almost certain 50bp hike', says Ipek Ozkardeskaya, Senior Analyst of Swissquote Bank today.

10-year yields now at highest levels in over a decade

'What does that mean for investors? First, it means higher bond yields, as the hawkish ECB expectations directly impact the bond yields, sending them higher. As such, German, French, Italian and Spanish 10-year yields are now at the highest levels in more than a decade. They are at levels reached during the European debt crisis at the start of 2010s', Ozkardeskaya continues.

'Higher yields are good for the euro - even if it won’t necessarily reverse the negative trend against the dollar, it should at least slow the selloff. But hotter-than-expected inflation is not necessarily good for European stocks, as higher inflation means higher ECB rates, higher ECB rates mean higher bond yields, higher bond yields mean more expensive financing for companies, more expensive financing for companies means less projects, less manufacturing, less services, and that, in return, means lower revenues for companies.

Though a stronger euro helps companies eke out better profits as a stronger currency makes raw material and energy costs more affordable for European businesses, higher yields could weigh more on the balance than a stronger euro. Therefore, what’s probably next for the stock market is a downside correction, following a rally between last October and this February.'