Although the central banks have to continue fighting inflation with interest rate hikes, the financial markets were in a party mood on Thursday.
After the interest rate hike by the European Central Bank (ECB), the German share index Dax rose by a good 2 percent at times and reached 15,488 points, its highest level in almost a year.
This year alone, the Dax has increased by 11 percent.
It's been around 30 percent since its low at the end of September.
Markus Fruehauf
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Daniel Mohr
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The ECB raised the key interest rate by 0.5 percentage points to 3 percent on Thursday and announced that it would raise it by another 0.5 percentage points in March.
ECB President Christine Lagarde said: "We still have some ground to make up." She is referring to the US Federal Reserve, which last year started raising interest rates months before the ECB and increased its interest rate by a quarter of a percentage point on Wednesday.
The ECB has actually made up ground for the first time in this interest rate cycle.
With a range of 4.5 to 4.75 percent, the American key interest rate is still significantly higher than the European interest rates.
However, the optimism on the capital markets is fueled by the fact that interest rates are rising more slowly than before, both in America and in Europe.
Although Fed President Jerome Powell stressed on Wednesday evening that the risks of easing too early are greater than the risks of monetary policy being too tight, the markets focused on the part of his speech that they felt gave cause for optimism.
Powell also said that the first successes in the fight against inflation could be seen.
Wall Street had already celebrated this with price gains on Wednesday evening.
The clear differentiation of the stock markets was striking: while the Dow Jones of the standard stocks rose only one percent on Wednesday after the interest rate decision and opened slightly in the red on Thursday, the technology stocks on the Nasdaq celebrated a plus of 2.5 percent on Wednesday and placed in the early Thursday trading a good 2 percent down.
Tech stocks had suffered significantly from the interest rate turnaround as many of these growth stocks found their way into portfolios in the hope of future gains.
However, in a higher-interest world, future profits are discounted at a higher interest rate and are correspondingly less valuable today.
The Tec-Dax in Frankfurt, which gained more than 4 percent on Thursday, also showed the dynamics that can develop with a different view of the future interest rate world.
In America, tech stocks such as Facebook group Meta, supported by good business figures, jumped 20 percent, Google group Alphabet rose by 6 percent, Amazon by 4 percent.
In Frankfurt, Infineon, Sartorius and Healthineers were particularly in demand.
But real estate stocks like Vonovia continued their price rally of the past few weeks in the hope that the interest rate hikes would come to an end in the foreseeable future.
"Slowly, a double contradiction between market opinion and the Fed is emerging: disagreement over the final interest rate peak and disagreement over whether there will be interest rate cuts again this year," observes Ulrich Leuchtmann, Commerzbank's foreign exchange strategist.
On the other hand, Laura Frost, investment strategist in the bond area of the fund company M&G, sees no contradiction.
It was less the rate move than the Fed's subsequent statement that they believe moved markets.
The Fed has not been so relaxed since 2018 and 2019.
"This makes it clear that we are approaching the end of the rate hike cycle," Frost said with conviction.
The two economists at asset manager Pimco, which specializes in bonds, Tiffany Wilding and Allison Boxer, also believe that the Fed's interest rate pause is not far away given the recent weakening of some economic indicators: "Based on our assessment of the Fed's previous communication and our base scenario, we expect a moderate recession another 25 basis point rate hike in March before the Fed paused.
It should start gradual rate cuts sometime in the second half of the year.”
On Thursday afternoon, ECB President Christine Lagarde tried in vain to add some water to investors' wine by warning that inflationary pressures would remain high.
After the meeting in March, the ECB wants to examine the further course.
On the foreign exchange market, investors initially followed the words of Lagarde, who wants to make up interest rates, and bought the euro.
For the first time since April, one euro has cost more than $1.10.
In November, the dollar had cost more than one euro.
In the later course of trading, the euro fell back to around 1.09 dollars.
Buying sentiment also prevailed on the bond markets.
Prices rose, causing yields to fall.
The market interest rate on the ten-year federal bond fell from 2.284 to 2.096 percent.
The yield on the two-year Federal Treasury note fell from 2.658 to 2.553 percent.
The short-term yields are therefore still higher than the long-term ones.
In such a case, the financial markets speak of an inverted interest rate curve, which is considered a recession signal.
However, market observers repeatedly emphasize that this signal says nothing about the timing and extent of the recession.
The prevailing view is that there will only be a very mild recession this winter.
In America, the interest rate differential is even more pronounced.
There, the yield for bonds with a term of ten years is 3.37 percent, after 4.24 percent in the autumn high.
For two years, the return is 4.1 percent, the high is 4.7 percent.
Declining market interest rates are also fueling optimism, for example in the area of mortgage lending.
Here, interest rates have fallen again by 0.5 percentage points in recent months.