European markets opened strongly on Thursday, taking cue from a rally overnight on Wall Street after the Fed kept rates on hold, but worry over strength in the euro meant gains didn’t last long.
The Fed erred on the side of caution by keeping interest rates on hold and lowering forecasts for the pace of future hikes. A more dovish Fed could be a problem for the shares of Eurozone countries since it unwinds some of the export advantage that came about because of accommodative ECB policies.
UK stocks are outperforming those in Europe thanks to a gain in resource shares which have benefitted from a rally in dollar-denominated commodities following the Fed meeting.
European central banks joined in on a whitewash of central bank dovishness. The Swiss National Bank lowered its growth and inflation targets and the Norges Bank cut interest rates to 0.25%. The Norwegian central bank even went so far as to signal a willingness to try negative interest rates. A move to NIRP in Norway would just put it in line with Sweden, Switzerland and Eurozone countries.
Bank shares do especially not like the prospect of negative rates in Norway nor the rally in the euro. The STOXX Europe 600 Bank index fell over 1.5% Thursday morning with multiple Italian bank stocks getting halted and HSBC and RBS near the bottom of the FTSE 100.
Core Eurozone CPI rising above consensus to 0.8% y/y is likely to fuel more euro strength and add to the difficulty for Europe’s exporters.
The Bank of England is next to announce policy on Thursday. If anything, the Fed decision to hold-off on raising rates in March has put back even further the time horizon in which the Bank of England could start to normalise monetary policy. Expectations are for another 0-0-9 vote to keep interest rates unchanged. It’s hard to imagine accompanying BOE meeting minutes turning more hawkish before the June Brexit vote given Governor Mark Carney’s warnings about the risks of uncertainty.
US stocks look set to open lower on Thursday after futures erased early gains to match losses in Europe.
USA pre-opening levels
S&P 500: 4 points lower at 2,023
Dow Jones: 13 points lower at 17,312
Nasdaq 100: 18 points lower at 4,386
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