By Geoffrey Smith
Investing.com -- The European Central Bank is set to raise interest rates for the first time in a decade. Its last rate hikes triggered a sovereign debt crisis in Italy. Coincidentally or not, former ECB President Mario Draghi chose today to end his term as Prime Minister of Italy, causing sharp drops in Italian bonds and stocks. Tesla's quarter-on-quarter profit fell for the first time in a couple of years due to 'supply chain hell'. The U.S. releases weekly jobless claims data and the Philadelphia Fed's monthly business survey. And things are moving in eastern Europe, as Russia - which threatened to annex southern Ukraine on Wednesday - restarted gas flows through the Nord Stream pipeline. Ukraine, meanwhile, was forced to devalue its currency by over 20% due to the pressures of war. Here's what you need to know in financial markets on Thursday, 21st July.
1. ECB set for first rate hike in a decade; BoJ stands pat
The European Central Bank is set to raise its official interest rates for the first time in a decade at its governing council meeting. Despite reports earlier this week that the bank will discuss hiking by 50 basis points, the consensus remains for a 25 basis point increase, as flagged by the bank itself at its last meeting. The ECB is also due to give more detail on the design of its 'anti-fragmentation tool', which has the intention of keeping bond markets orderly as the rate hike cycle puts upward pressure on government borrowing costs.
The decisions will be announced at a new time of 8:15 AM ET (1215 GMT), half an hour later than usual. President Christine Lagarde's press conference is shifted back by only 15 minutes and will begin at 08:45 AM ET (1245 GMT).
Other central banks around the world have also been active overnight, although the Bank of Japan's activity was limited to raising its inflation forecast: it remains too concerned about the state of the Japanese economy to tighten policy in any meaningful way. Elsewhere in Asia, the central bank of Indonesia paused its hiking cycle, also with an eye on faltering economic growth, while in Europe, Turkey's central bank is expected to keep its key rate at 14%.
2. Tesla snaps winning streak, sells Bitcoin
Tesla (NASDAQ:TSLA) reported its first quarter-on-quarter drop in revenue and profit at Tesla in over a year, which CEO Elon Musk attributed to ‘supply chain hell’ in the second quarter, notably through the lockdown in Shanghai. Net profit of $2.3 billion was above forecasts but below the $3.3 billion posted in the first quarter.
The company repeated its guidance for 50% revenue growth this year but acknowledged that meeting that target had become more difficult.
Tesla also said it had sold around three-quarters of the Bitcoin it bought last year in order to raise liquidity to help it through a difficult quarter. The price of Bitcoin dipped on the news but stayed above $23,000.
3. Stocks set to open mixed; jobless claims and Philly Fed due
U.S. stock markets are set to open mixed later, with Tesla’s quarterly report dominating the conversation as the ongoing earnings season continues. Reports of hiring being slowed at Microsoft (NASDAQ:MSFT), Google (NASDAQ:GOOGL) and Lyft (NASDAQ:LYFT) are also concentrating minds, while United Airlines will open under pressure after a bad miss on profit.
By 6:30 AM ET, Dow Jones futures were down 57 points, or 0.2%, while S&P 500 futures were flat, and Nasdaq 100 futures were up 0.2%.
Philip Morris (NYSE:PM) and AT&T (NYSE:T) are the biggest companies to report early, while overnight, SAP (NYSE:SAP) reported disappointing earnings, while Swiss pharma giant Roche (SIX:ROG) and Finnish telecoms networking company Nokia (NYSE:NOK) rose to a two-month high after better-than-expected earnings.
The U.S. will also release jobless claims data and the Philly Fed business survey at 8:30 AM ET.
4. 'Super Mario' sends Italian markets into a funk
Mario Draghi resigned as Prime Minister of Italy after the parties in his broad government of national unity defied his call to put aside their differences and renew the coalition. The move makes it likely that President Sergio Mattarella will call for new elections in September or October.
Italian stocks and bonds fell sharply on the news, as Draghi has been the guarantor of political stability and economic orthodoxy since taking over as Prime Minister in February 2021. Italy's competing political parties are likely to jeopardize that in the near term with election campaigns that will doubtless promise to spare voters the pain of Draghi's proposed reforms. That in turn puts at risk EU approval for over 200 billion euros ($205 billion) of post-pandemic reconstruction funds from the EU.
In the immediate future, it also constrains the ability of the ECB to give Italy the kind of support that Draghi managed to do while he was ECB President a decade ago.
5. Russia resumes gas shipments through Nord Stream
Having wielded the stick of annexation threats on Wednesday, Russia dangled the carrot of steady energy supplies on Thursday, restarting gas shipments through the Nord Stream pipeline to Germany and raising shipments to Italy, its second-biggest European customer.
President Vladimir Putin nonetheless warned that further cuts are likely if Germany and Canada don’t send crucial compression equipment back on time after maintenance.
Elsewhere, former Russian President Dmitry Medvedev warned in a Telegram post, that Ukraine could “disappear from the map” and lose its sovereignty, while the economic pressures of the war forced the Ukrainian central bank to devalue the hryvnia by over 20%.