The ASX ended its trading week with a flat session as investors digested the European Central Bank’s first rate hike in more than a decade amid growing political uncertainty in Italy.
- The ECB’s key rate stopped being negative for the first time since 2014
- Gas flows from Russia to Germany have resumed via the Nord Stream 1 gas pipeline
- Tech stocks continue to rally in the United States, despite signs of a slowdown in the broader economy
Australia’s benchmark ASX 200 finished virtually flat, down just 3 points, at 6,792, while the broader All Ordinaries index was down 0.1%, at 7,012.
On a calm day locally, the big news for borrowers was the growing consensus among big bank economists that interest rates will rise sooner.
Westpac and NAB have updated their interest rate forecasts, with the former joining ANZ in expecting a cash rate of 3.35%, although it expects it will take a little longer long at the Reserve Bank to get there – February instead of November.
NAB’s peak forecast is a little lower at 2.85% in November, slightly above CBA’s recently updated forecast of a cash rate of 2.6% by then.
RateCity analysis shows that the lower of these forecasts would add $687 a month to a $500,000 mortgage, compared to rates before the first cash rate hike in May, while the higher forecast would cost to this borrower $909 more per month.
“The big four banks are now expecting two double [rate] hikes at the next two RBA meetings, with Westpac and ANZ both expecting the cash rate to reach 3.35% in the coming months,” said Sally Tindall of RateCity.
The prospect of higher interest rates appeared to boost bank stock prices.
ANZ led the big four banks higher, up 3% at the end of the week, when it announced plans to buy Suncorp’s banking division.
National Australia Bank (0.7%) and Westpac (1.1%) also rose strongly, but Commonwealth Bank recorded only a 0.2% increase.
The Australian dollar did not match those gains, falling slightly on the day to 69.17 US cents.
IAG flags natural disasters in earnings update
Insurer IAG announced preliminary unaudited results for the year ended June 30, with an increase in natural disaster costs as a notable item.
IAG’s net natural peril costs are expected to be $1.12 billion, an increase of $354 million from the insurer’s initial provision of $765 million.
This is not only due to unprecedented waves of flooding in eastern Australia, but also the increased cost of repairing and replacing damaged homes, cars and household items.
The company’s chief executive, Nick Hawkins, said IAG has bolstered its current year provisions as a result.
“We have been impacted by claims inflation in our core home and auto portfolios and have significantly increased our natural peril indemnity to help ensure the business can withstand the impact of the increasing frequency and severity of natural perils,” he said in a statement. market.
Despite this impact, IAG is expected to rebound from a loss of $427 million in fiscal 2021 to a profit of $347 million in 2022.
It also issued a positive forecast, indicating that business and premium growth are offsetting these rising costs.
The company also benefited from the withdrawal of $200 million from its provisions for an ongoing claim by thousands of customers for business interruption insurance to cover losses related to the COVID-19 pandemic.
IAG reduced its provision, based on some favorable legal outcomes for insurers in court cases last year.
Its shares closed down 1.4%, at $4.21.
Elsewhere in the market, Zip continued its recent rally, up 13.6% to 88 cents.
Other big winners yesterday also continued to rise, such as Telix Pharmaceuticals (+5.5%) and Megaport (+4.3%).
Pointsbet Holdings jumped 16.3% to $3.29 to be the biggest gainer on the ASX 200 on Friday.
ECB surprises with bigger rate hike
Europe has been at the center of the market’s attention overnight for several reasons.
The ECB’s benchmark deposit rate was raised 50 basis points more than expected to 0% – the first time it has not been negative since 2014.
It was the ECB’s first rate hike since 2011, but NAB’s Tapas Strickland said traders expected it to be one of many.
“The market has priced the rate hike for the ECB forward, with a 75 basis point chance at the next meeting in September and around a 70% chance of another 50 basis point hike for October, but little change in the expected peak in the cycle,” he wrote.
Capital Economics’ chief European economist Andrew Kenningham said he also expects many more rate hikes as the ECB tries to catch up with central banks around the world scrambling to raise rates. rates to contain galloping inflation.
“We believe this will be the first in a series of hikes whereby the ECB will raise the deposit rate to around 2% next year,” he wrote.
One of the potential triggers for such a crisis would be the collapse of the Italian coalition government of former ECB President Mario Draghi.
The upheaval – which means there will be elections in the country on September 25 – has seen Italian government bonds sold on fears of another debt crisis for the nation, with the gap, or the gap between Italian and German 10-year bond yields (interest rates) rising to 2.3 percentage points.
However, traders have been appeased by another development on the continent, with the resumption of gas flows from Russia to Germany via the Nord Stream 1 gas pipeline.
“There are indications that gas flow will restart at 40% capacity, roughly where it was before the maintenance shutdown, which is more than the market expected,” he said. said Mr. Strickland.
“Russian President Putin, however, has warned that flows could still fall to around 20% as early as next week.
“After initially falling 8%, European natural gas futures came back flat on the day.”
US markets gain again on technology
The tech sector led US markets higher again, with Tesla’s better-than-expected results released just after the close of trading yesterday, sending the automaker’s share price up nearly 10% , at US$815.12.
The tech-heavy Nasdaq index gained 1.4%, to 12,060 points, the broader S&P 500 rose 1% and the Dow Jones Industrial Average climbed 0.5%.
“So far in this bear market rally, the S&P500 is up 9.1%, although it is still 16.6% off its peak,” Strickland said.
“Overnight, US telephone company AT&T said there had been an increase in late payment of phone bills.”