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ECB raises rates by 25bps, as US banking turmoil continues

While May the 4th may well be known as Star Wars Day, there’s been very little evidence that the force is with markets today with weakness across the board.


It’s been another negative session for markets in Europe, reversing all the modest rebound that we saw yesterday, and a little bit more, with the FTSE100 hitting a 4-week low, and the DAX a 3-week low.

The decision by the ECB to raise rates by 25bps was as expected, with the euro slipping back, despite President Christine Lagarde’s assertion that the ECB had more to do.   

The weakness in US markets is exacerbating the negative sentiment, over concerns that the turbulence in its banking sector will drag the US economy into recession, and where the US leads, Europe inevitably tends to follow.

The long-awaited economic rebound in China also appears to be faltering if the latest PMI numbers are any guide, which is also acting as a drag.

There’s not been much to cheer today although Next has been a positive stand out, their shares higher after the retailer reported that full price sales fell -0.7% during Q1, but they did maintain their guidance for full year pre-tax profit at £795m. The sales decline was better than the forecast of a -2% decline. The uncertain retail environment meant that the company was reluctant to revise its sales guidance over the rest of the year, with Q2 sales expected to see a fall of 5%, due to expectations of weaker demand due to some pull forward effects into Q1.

Shell share price is also higher, after reporting Q1 profits which were much better than forecast, coming in at $9.6bn, only a modest decline from Q4’s $9.8bn, on revenues of $86.96bn.

This is well above the same quarter last year, with integrated gas contributing $4.9bn to the overall profit numbers, a $1.1bn decline from Q4, but still the second highest number ever. Shell also maintained its dividend at 28.75c a share and announced another $4bn share buyback for the quarter.

Other key areas of outperformance were in chemicals and products which saw a big jump in profits of over $1bn to $1.78bn, primarily due to a big jump in margins. Renewables and energy solutions saw profits rise to $400m, from $300m in Q4. The announcement that Shell has maintained its buyback at $4bn has also helped push the shares higher in a move that is likely to be further political catnip to its detractors.

Defence contractor BAE Systems has seen its shares slide back after reaffirming its full year guidance. The company expects sales to rise between 3% and 5%, above last year’s £23.26bn, along with free cash flow of in excess of £1.2bn.    


US markets are on the back foot after weekly jobless claims rose to 242k from 229k the week before, although continuing claims fell more than expected to 1,805k.

Fed chairman Powell’s press conference last night didn’t offer too much in the way of comfort to those concerned about the US banking sector, with his comment regarding the stability of the US banking sector having a very short shelf life, with PacWest Bancorp and Western Alliance Bancorp both trading sharply lower today.

PacWest Bancorp has taken another nosedive after announcing after the market closed yesterday that it was considering its options with respect to raising new capital as well as considering a sale of the business. It’s been a sharp shift in sentiment given that last week the bank said that deposits rose in March when it reported its quarterly numbers. The announcement came only hours after Federal Reserve Jay Powell announced that he was confident in the resilience of the US banking system.

Western Alliance appears to be following suit with a similar sale process, according to reports circulating this afternoon, although these were later denied by the bank as “absolutely false”.

Recent events have prompted a sharp reversal in sentiment for those who thought that the rescue of First Republic Bank had lanced the boil of uncertainty around the regional US banking sector, with investors eyeing the sector in order to determine who might be next.   

Paramount Global shares also fell sharply after announcing it was slashing its dividend to $0.05c a share, after Q1 revenue fell to $7.26bn. The film division saw a decline of 6% in its revenue stream, while TV media saw an 8% decline to $5.2bn. The only plus point was a 39% increase in direct-to-consumer revenues to $1.5bn. Paramount+ saw a rise of 4.1m subscribers to 60m.

Paramount also said it was looking to restart the sale process for Simon & Schuster.   

Moderna shares have moved higher after Q1 revenues crushed forecasts today, coming in at $1.86bn, well above forecasts of $1.18bn, on the back of stronger vaccine demand. The company also posted a surprise profit of $79m. While vaccine demand was higher than expected, revenues were still a lot lower than they were a year ago when Moderna saw $5.92bn. Moderna says it expects annual sales of between $8bn and $15bn by the end of the decade.

In a further sign the travel sector is recovering, Royal Caribbean Cruises upgraded its full year estimates for profits from $3 to $3.60 to between $4.40 and $4.80.

Apple shares are also in focus ahead of tonight’s Q2 numbers. When they reported their Q1 numbers, which saw a 5% decline in revenues, they went on to warn they expected to see a similar 5% decline in Q2 revenue as well, the first time we’ve seen such declines since 2016.

On a side note, Apple may have benefited from the recent banking turmoil after it launched a banking service and a new savings account with a 4.15% interest rate, although you need to have an Apple credit card to qualify. Q2 profits are expected to come in at $1.43c a share and revenues at $92.56bn.


The euro has slipped back after the ECB took a step down and raised rates by 25bps, while undertaking that further rate rises will be dependant on future economic data. The immediate reaction was that this was a “dovish” hike with the euro slipping to the lows of the day.

The reaction in yields was much more telling, with a sharp fall of 10bps in the German 2 year in the aftermath of the decision, suggesting that markets think European rates have peaked.

One the press conference got underway, we saw a partial reversal in these yields, with Lagarde insisting that the ECB remained far from done, and the admission that the decision was almost unanimous suggests that there are significant divisions on the governing council with perhaps some looking for a more aggressive hike.

It will be no surprise to anyone who these hawkish members are, but the bank lending survey appears to be prompting caution on committing to further rate increases until the pass-through effects of previous increases can be properly assessed. Lagarde’s insistence that the ECB is far from done and “not pausing” is a clear nod to these more hawkish members in looking to keep them onside.

The pound has held up reasonably well in the aftermath of the two rate decisions from the Federal Reserve and ECB, with today’s latest economic data pointing to a resilient UK economy. With the Bank of England due next week, we’re likely to see the UK central bank follow suit with a 25bps rate hike of its own, especially with CPI still above 10%.


Crude oil prices have continued to slide on the back of the ongoing turmoil in the US banking sector, as another 2 regional banks struggle to survive. Increased uncertainty over tightening credit conditions in the weeks ahead, is also weighing on the demand outlook, with the recent turmoil in the US banking sector likely to prompt a degree of retrenchment and caution from other US lenders. Saudi Arabia also cut prices to its Asia customers on the back of the weaker outlook for demand.  

Gold prices briefly pushed up close to a new record high against the US dollar earlier today in the aftermath of yesterday’s Fed decision, as yields fell back sharply, before slipping back again, however given the current uncertainty it can surely only be a matter of time before we see a new record high in the days and weeks ahead. .


Yesterday’s key event was the FOMC rate decision and although the widely anticipated quarter point rate hike came through, the bigger issue was the absence of any commitment that this would be the end of the policy tightening cycle. That was sufficient to impact confidence in US equities, with the smaller cap Russell 2000 index taking quite a pronounced hit. The underlying reversed most of its gains from the session, leaving one day volatility at 22.19% against 18.49% for the month.

Crude oil prices briefly traded down to levels not seen since mid-March as despite falling inventories, a backdrop of rising interest rates plus concerns over the outlook for the wider global economy continue to take a toll here. One day vol on WTI crude printed 37.94% against 30.6% on the month.

It was a turbulent session for AUD/USD on Wednesday. With the market having digested that surprise RBA rate hike news, the Fed’s verdict and accompanying outlook also needed to be priced in. That left the pair rattling around in a 1% range, delivering one day vol of 14.4% against 10.12% on the month.

And interest in European Union banks remained elevated on Wednesday, too. The underlying sold off heavily on Tuesday, but downside pressures are persisting, with one day volatility coming in at 45.6% against 37.64% on the month.

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