European equity close: Italy lags as parliament dissolved

Markets are trying to come to grips with the surprise ECB 50 bps, the Transmission Protection Instrument, flows resuming in Nord Stream 1 and Italy dissolving parliament.

That’s a lot to take in and it led to a choppy day of trading

  • Stoxx 600 +0.3%
  • German DAX -0.6%
  • French CAC flat
  • Spain IEX -0.3%
  • Italy MIB -1.0%

Global markets are having a nice rally in the past week or so but Italy isn’t participating.

Italy MIB chart July 21

ECB raises key rates by 50 bps in July monetary policy decision vs 25 bps expected

  • Prior decision
  • Deposit facility rate 0.00% vs -0.25% expected
  • Main refinancing rate 0.50% vs 0.25% expected
  • Marginal lending facility 0.75% vs 0.25% prior
  • Decision to raise by 50 bps is based on updated assessment of inflation risks
  • ECB approves of Transmission Protection Instrument (TPI)
  • Further normalisation of interest rates will be appropriate
  • Frontloading strategy allows ECB to make a transition to a meeting-by-meeting approach
  • The establishment of the TPI is necessary to support the effective transmission of monetary policy
  • TPI can be activated to counter unwarranted, disorderly market dynamics that pose a serious threat to the transmission of monetary policy
  • PEPP reinvestments remains the first line of defence to counter those risks though
  • Full statement

The euro has jumped on the decision with EUR/USD moving up from 1.0195 to 1.0250 as the ECB chooses to frontload its interest rate increases. In my view, it is a bit careless as their communication through all these months have been to push for a 25 bps rate hike but it is what it is.

Nord Stream relief to prove short-lived

The takeaway from the news today is that the Nord Stream 1 pipeline has seen gas flows restart and capacity has returned to before the maintenance period shutdown i.e. 40% or 67 million cubic metres per day. But as mentioned earlier here, a second turbine will be due for repairs next week and that is likely to see capacity halved to 30 million cubic metres per day.

For now, the resumption of the gas flows will buy Germany some time and slight relief but the overall gas situation remains tense. The gas shortage in Europe is already being exacerbated by a multitude of factors and Russia cutting supplies is a major one in that regard. As much as markets are holding some calm on the news today, it is going to be a brutal winter for Europe with gas rationing potentially on the cards.

BOJ’s Kuroda: A large rate hike would be needed to stop yen weakness

  • Raising rates by a little bit will not stop yen weakness
  • Some countries that have raised rates have even seen their currencies weaken
  • A large rate hike would bring substantial damage to the Japanese economy

That pretty much reaffirms that they are not really in the mood to shift their policy thinking one bit for the time being. It’s the finger-pointing way of justifying it but hey, whatever it takes. USD/JPY now trading up by 0.3% to the highs for the day at 138.65.

Gas deliveries reportedly to have resumed via Nord Stream 1 pipeline

Getting a couple of reports on this via the dpa news agency and, both citing a spokesman for the pipeline. The preliminary data points to gas deliveries that were about as large as before the Nord Stream 1 pipeline was shut down due to maintenance i.e. roughly 40% capacity. The announced quantity can still change until shortly before delivery though so that will be something to watch.

A huge day coming for EUR: ECB rate hike, Italian political turmoil, Gas to flow (recuted)

The European Central Bank will be raising rates tonight. Expectations are roughly split on a 25bp or 50bp hike. Of even more interest though will be details of the Bank’s proposed anti-fragmentation tool:

  • this is intended to support vulnerable peripheral government bond markets (Italy, for example) – i.e limiting peripheral yield spikes (i.e. peripheral bond sell-offs)

ECB announcement is due at 1215 GMT (note the new scheduled times)

  • press conference follows at 1245 GMT
  • for previews, see under the chart below

Also coming up Thursday 21 July 2022, Italian politics

  • Draghi to announce his resignation in the Chamber tomorrow

And, Nordstream flows are expected to recommence, but in a limited state (I’ve seen credible forecasters tipping as low as 20% of capacity):

  • Germany gas transportation company says it assumes Nord Stream will return at 40%
  • Goldman Sachs reiterates its view that Russia will return gas to Nordstream at just 40%
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