European Stocks Lower; Russian Gas Move, Bank Earnings in Focus

European stock markets traded largely lower Wednesday, as investors digested ramped up geopolitical tensions, a troubled global growth outlook as well as mixed quarterly corporate earnings.

By 4:05 AM ET (0805 GMT), the DAX in Germany traded 0.3% lower, the CAC 40 in France fell 0.1%, while the U.K.’s FTSE 100 climbed 0.2%.

Tensions over the Russia-Ukraine conflict were heightened Wednesday after Gazprom, Russia's state-owned energy giant, confirmed that it has stopped supplies to Poland and Bulgaria. 

It's the first time that Russia has interrupted supplies to EU members in over 40 years of shipping natural gas, caused crude prices to rise and increased concerns about Europe’s energy security.

Russia is demanding payments for its gas in rubles as sanctions over its invasion of Ukraine bite, something that most western countries are not prepared to comply with as that could undermine the sanctions.

By 4:05 AM ET, U.S. crude futures traded 0.2% higher at $101.86 a barrel, while the Brent contract rose 0.2% to $104.84. Both benchmarks gained around 3% on Tuesday.

European equity indices have also been pressured by worries that China’s insistence on stringent COVID restrictions will harm domestic and global growth as well as the hawkish pivot from the Federal Reserve potentially slowing growth at the world’s largest economy.

These factors resulted in consumer confidence in the euro area’s two biggest economies falling more than anticipated. In Germany, data dropped to an all-time low, while French figures declined to the lowest since 2018.

It’s a big day for earnings in Europe, with the banking sector once more to the fore.

Deutsche Bank (ETR:DBKGn) stock slumped 5.6% after the German lender warned that the Russia-Ukraine conflict could hurt full-year results, saying its funds set aside for credit losses are expected to increase "significantly" this year.

Credit Suisse (SIX:CSGN) stock fell 1.6% after the Swiss bank posted a first-quarter loss along with another set of top management departures. 

By contrast, Lloyds (LON:LLOY) stock rose 2.4% after the U.K. lender lifted its full-year outlook with demand for mortgages holding up even as it warned of the dangers to the British economy from higher inflation. 

Elsewhere, GlaxoSmithKline (NYSE:GSK) stock rose 0.7% after the pharmaceuticals giant beat expectations for its first-quarter results, helped by buoyant sales of its COVID-19 treatment.

Mercedes Benz Group (OTC:DDAIF) stock rose 1.4% after the carmaker confirmed its guidance for the full-year with high prices making up for supply chain troubles, Telia (ST:TELIA) stock advanced 1.1% after the Swedish telecoms operator posted better-than-expected quarterly earnings, and DSV (CSE:DSV) stock climbed 2.7% after the Danish transport company raised its 2022 outlook.

There were also significant earnings after Tuesday’s close on Wall Street, with Google parent Alphabet (NASDAQ:GOOGL) reporting first-quarter revenue below expectations, while software giant Microsoft (NASDAQ:MSFT) forecast double-digit revenue growth for its next fiscal year.

There are more significant U.S. earnings releases Wednesday from companies such as Meta Platforms (NASDAQ:FB), T-Mobile (NASDAQ:TMUS), and Boeing (NYSE:BA).

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Breaking: ECB leaves rates unchanged at -0.50% as expected, reiterates QE to end in Q3

The European Central Bank left its benchmark deposit rate unchanged at -0.50% on Thursday as unanimously expected by analysts. The central bank also reiterated its guidance that net asset purchases (Quantitative Easing or QE) should end in Q3. 

ECB Statement:

"Russia’s aggression in Ukraine is causing enormous suffering.

It is also affecting the economy, in Europe and beyond.

The conflict and the associated uncertainty are weighing heavily on the confidence of businesses and consumers.

Trade disruptions are leading to new shortages of materials and inputs.

Surging energy and commodity prices are reducing demand and holding back production.

How the economy develops will crucially depend on how the conflict evolves, on the impact of current sanctions and on possible further measures.

At the same time, economic activity is still being supported by the reopening of the economy after the crisis phase of the pandemic.

Inflation has increased significantly and will remain high over the coming months, mainly because of the sharp rise in energy costs.

Inflation pressures have intensified across many sectors.

At today’s meeting the Governing Council judged that the incoming data since its last meeting reinforce its expectation that net asset purchases under its asset purchase programme should be concluded in the third quarter.

Looking ahead, the ECB’s monetary policy will depend on the incoming data and the Governing Council’s evolving assessment of the outlook.

In the current conditions of high uncertainty, the Governing Council will maintain optionality, gradualism and flexibility in the conduct of monetary policy.

The Governing Council will take whatever action is needed to fulfil the ECB’s mandate to pursue price stability and to contribute to safeguarding financial stability.

Asset purchase programme (APP)

Monthly net purchases under the APP will amount to €40 billion in April, €30 billion in May and €20 billion in June.

The calibration of net purchases for the third quarter will be data-dependent and reflect the Governing Council’s evolving assessment of the outlook.

The Governing Council also intends to continue reinvesting, in full, the principal payments from maturing securities purchased under the APP for an extended period of time past the date when it starts raising the key ECB interest rates and, in any case, for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.

Key ECB interest rates

The interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.50% respectively.

Any adjustments to the key ECB interest rates will take place some time after the end of the Governing Council’s net purchases under the APP and will be gradual.

The path for the key ECB interest rates will continue to be determined by the Governing Council’s forward guidance and by its strategic commitment to stabilise inflation at 2% over the medium term.

Accordingly, the Governing Council expects the key ECB interest rates to remain at their present levels until it sees inflation reaching 2% well ahead of the end of its projection horizon and durably for the rest of the projection horizon, and it judges that realised progress in underlying inflation is sufficiently advanced to be consistent with inflation stabilising at 2% over the medium term.

Pandemic emergency purchase programme (PEPP)

The Governing Council intends to reinvest the principal payments from maturing securities purchased under the PEPP until at least the end of 2024.

In any case, the future roll-off of the PEPP portfolio will be managed to avoid interference with the appropriate monetary policy stance.

In the event of renewed market fragmentation related to the pandemic, PEPP reinvestments can be adjusted flexibly across time, asset classes and jurisdictions at any time.

This could include purchasing bonds issued by the Hellenic Republic over and above rollovers of redemptions in order to avoid an interruption of purchases in that jurisdiction, which could impair the transmission of monetary policy to the Greek economy while it is still recovering from the fallout from the pandemic.

Net purchases under the PEPP could also be resumed, if necessary, to counter negative shocks related to the pandemic.

Refinancing operations

The Governing Council will continue to monitor bank funding conditions and ensure that the maturing of operations under the third series of targeted longer-term refinancing operations (TLTRO III) does not hamper the smooth transmission of its monetary policy.

The Governing Council will also regularly assess how targeted lending operations are contributing to its monetary policy stance.

As announced, it expects the special conditions applicable under TLTRO III to end in June this year.

The Governing Council will also assess the appropriate calibration of its two-tier system for reserve remuneration so that the negative interest rate policy does not limit banks’ intermediation capacity in an environment of ample excess liquidity.

The Governing Council stands ready to adjust all of its instruments within its mandate, incorporating flexibility if warranted, to ensure that inflation stabilises at its 2% target over the medium term.

The pandemic has shown that, under stressed conditions, flexibility in the design and conduct of asset purchases has helped to counter the impaired transmission of monetary policy and made the Governing Council’s efforts to achieve its goal more effective.

Within the Governing Council’s mandate, under stressed conditions, flexibility will remain an element of monetary policy whenever threats to monetary policy transmission jeopardise the attainment of price stability.

The President of the ECB will comment on the considerations underlying these decisions at a press conference starting at 14:30 CET today."

Market Reaction

The euro saw a substantial drop in reaction to the latest ECB policy announcement. EUR/USD has dipped to around the 1.0875 area from around 1.0915 prior to the release and now trades with on the day losses of around 0.1% versus earlier gains of around 0.3%.  

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