ECB Liftoff

Weekly Briefs
25 Jul 2022
8 min read
ECB Liftoff

This past week was definitely an eventful one. Netflix reported second-quarter results that were much better than feared thanks to the latest season of its hit show Stranger Things. Europe’s most important river is drying up, and that’s exacerbating the region’s energy crisis. Tesla sold off the majority of its bitcoin holdings. But perhaps the biggest news of the week was the European Central Bank’s decision to finally lift interest rates for the first time in 11 years.


The European Central Bank raised its key interest rate by 50 basis points on Thursday – the first increase in 11 years and the biggest since 2000. That was more than the 25 basis points the ECB had previously guided for and brings its deposit rate to 0%, which effectively ends eight years of negative interest rates. The move comes as the ECB confronts surging inflation in the eurozone that’s now more than four times higher than the central bank’s 2% target.

The ECB has underestimated inflation pressures that are only being made worse by the disruption of energy supplies after the outbreak of war. Source: Bloomberg

The bigger-than-expected move sent both the euro and eurozone government bond yields higher. But the ECB wants to avoid too much of the latter: it unveiled a new tool to help ensure markets don’t push up borrowing costs too aggressively in weaker economies, as happened during the 2012 eurozone debt crisis. That came amid a fresh bout of political turmoil in Italy after the country’s prime minister resigned on Thursday, which sent the spread between Italian government bond yields and German ones higher.

All told, the ECB joins 80 other central banks in lifting interest rates this year in a bid to fight red-hot inflation, but it faces a tougher task than most. That’s down to the growing fears that higher interest rates will tip the eurozone into recession. The bloc has already been hit by soaring energy and food prices following the outbreak of war, a big slowdown in business activity, and a drop in consumer confidence to record lows.


The first quarter of the year was one to forget for Netflix after the streaming giant lost subscribers for the first time in more than a decade. And while it did warn that it was expecting to lose another 2 million subscribers in the second quarter, there were hopes that the latest season of its hit show Stranger Things would help stop the bleeding. Turns out it did: the firm lost just 970,000 subscribers last quarter – less than half what analysts were expecting.

One thing that probably helped Netflix from hemorrhaging members is its recent experiments to drip-feed content to viewers over time, in a bid to hang onto subscribers who may otherwise have binged and canceled in one go. For example, the last two episodes of the latest season of Stranger Things aired on the 1st of July – a month after the first seven episodes aired and, quite smartly, a day after the second quarter officially ended. That probably allowed Netflix to hang onto more viewers and report better subscriber numbers for the second quarter.

All in all, the smaller drop in subscriber numbers, combined with cost cuts and higher membership prices, helped drive up profit by a better-than-expected 7% last quarter compared to the same time last year – and that’s despite the more than $300 million loss Netflix suffered from the stronger dollar hitting its international revenue. And while the firm said it expects to only add 1 million subscribers in the current quarter (well short of the 1.8 million analysts were expecting), investors were probably just relieved that last quarter wasn’t the disaster it might’ve been: they sent Netflix’s stock up 8% after the update.

Netflix lost more than a million subscribers in the first half of 2022 but is expecting to add a million in the third quarter. Source: Bloomberg


The graph below shows the water levels at one of Europe’s most important rivers: the Rhine. This roughly 800-mile river runs from Switzerland to the North Sea and is used to transport tens of millions of tons of commodities through inland Europe. On average, the river typically flows at a level of more than two meters in July. But today, the water level is below 0.8 meters – its lowest point for this time of the year since at least 2007 – due to droughts. Making matters worse, an ongoing heatwave in Europe is expected to push water levels even lower.

Drying up: The Rhine river's water level has dropped to its lowest level for the time of year since at least 2007. Source: Bloomberg

Shallow water levels mean many vessels carrying essential commodities either can’t pass or are forced to carry smaller loads. The situation is already contributing to supply problems of oil products (like diesel and heating oil) in Switzerland, and is preventing at least two power plants in Germany from getting all the coal they need. That’s one reason why only 65% of Germany’s power capacity from coal-fired plants is expected to be available in the coming months, according to S&P Global Commodity Insights.

River Rhine cargo flows by product type in 2019 and 2020. Source: Bloomberg

It’s not just the Rhine: many key rivers in Europe are also contending with very shallow water levels, and that’s impacting other forms of energy generation too. French nuclear plants rely on rivers for cooling, for example, while many countries use rivers to generate electricity using hydroelectric power plants. Seasonally, Spanish hydro generation is running at the second-lowest level in 20 years, while hydro generation is the weakest in a decade in France.

The timing is particularly painful because of the energy crisis in Europe, with natural gas shortages pushing the region to scramble for alternative energy sources. And if hydropower, coal, and nuclear production all end up getting disrupted, all Europe has left is wind and solar, both also subject to the whims of the weather…

At least the region got one piece of good news this week: Russia resumed sending natural gas supplies through the Nord Stream pipeline – Europe's main gas import infrastructure – after a 10-day maintenance period. That came as a relief because many had feared that Russia would use the planned maintenance works as an opportunity to turn off the taps for good, potentially triggering a recession in Europe.

But it’s not all sunshine and roses: the pipeline resumed at 40% capacity – the same level prior to the maintenance – and means the region is still struggling to properly fill up its gas storage facilities ahead of the winter season. That explains why this week the European Commission unveiled plans proposing that the bloc cut its natural gas consumption by 15% over the next eight months.

Gas storage levels in Europe are already below their 5-year average for this time of the year. Source: World Bank


It looks like Elon Musk is starting to capitulate a bit on crypto: during its second-quarter earnings update, Tesla revealed that it had sold off the majority of its bitcoin holdings, converting three-quarters of its stake into fiat currencies in the face of tumbling cryptocurrency prices. Musk said on the earnings call that the purpose of the sale was to maximize Tesla’s cash holdings because of the uncertainty related to Covid shutdowns in China, and that the sale should not be seen as “some verdict on bitcoin”. But traders weren’t convinced: bitcoin erased all of its gains on Wednesday after Tesla’s sales were disclosed.

Bitcoin gave back all of its gains for the day after Tesla revealed that it had sold off the majority of its bitcoin holdings. Source: Bloomberg

Next week

Earnings season continues with full investor focus on Big Tech: Alphabet (Google), Microsoft, Amazon, Meta Platforms (Facebook), and Apple are all scheduled to report results next week. These tech giants collectively represent a huge chunk of the US stock market’s value, so their earnings updates will have big implications on the wider market. On the economic calendar we have two major events coming out of the US. First, the second-quarter GDP report. Recall that the economy unexpectedly contracted during the first quarter, and if it turns out that GDP also contracted in the second quarter, then the US would be in a technical recession. Second, the outcome of the Fed’s meeting, where the US central bank is expected to hike interest rates by another 75 basis points.

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The information and data published in this research were prepared by the market research department of Darqube Ltd. Publications and reports of our research department are provided for information purposes only. Market data and figures are indicative and Darqube Ltd does not trade any financial instrument or offer investment recommendations and decision of any type. The information and analysis contained in this report has been prepared from sources that our research department believes to be objective, transparent and robust.

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