The ECB’s decision to raise rates in December by 0.25 percentage points, the first increase in five years, is expected to be followed by Japan, where investors expect the central bank to begin raising rates in 2006.
“We believe that investors are too sanguine about the impact of higher interest rates on equity markets in 2006 – 2005/06 is the first time since 1986 that investors have faced a coordinated global tightening of monetary policy,” says Clive McDonnell, European strategist at S&P.
S&P expects that further rate rises by the ECB will have a particularly adverse effect on eurozone banks, which benefited from double-digit growth in mortgage lending over 2004/05.
Rising benchmark bond yields and a flatter yield curve are also expected to hit fixed income sales and trading profits at the big German and Swiss investment banks.
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