The ASX has ended its trading week with a flat session, as investors digested the European Central Bank's first rate rise in more than a decade amid growing political uncertainty in Italy.
Australia's benchmark ASX 200 index finished virtually flat, down just 3 points, to 6,792, while the broader All Ordinaries was off 0.1 per cent, to 7,012.
On a quiet day locally, the big news for borrowers was the increasing consensus among the major banks' economists that interest rates will rise higher, sooner.
Westpac and NAB have updated their interest rate forecasts, with the former joining ANZ in expecting a cash rate of 3.35 per cent, although it expects it will take a little bit longer for the Reserve Bank to get there — February instead of November.
NAB's forecast peak is a bit lower, at 2.85 per cent by November, slightly above CBA's recently updated forecast of a 2.6 per cent cash rate by then.
RateCity analysis shows that the lowest of those forecasts would add $687 a month to a $500,000 mortgage, compared to where rates were before the first cash rate hike in May, while the highest forecast would cost that borrower an extra $909 a month.
"All big four banks are now expecting two double [rate] hikes at the next two RBA meetings, with Westpac and ANZ both predicting the cash rate will reach 3.35 per cent in coming months," RateCity's Sally Tindall said.
The prospect of higher interest rates appeared to boost bank share prices.
ANZ was leading the big four banks higher, up 3 per cent at the end of the week, when it announced its planned takeover of Suncorp's banking division.
National Australia Bank (0.7 per cent) and Westpac (1.1 per cent) also gained strongly, but the Commonwealth Bank had only a 0.2 per cent rise.
The Australian dollar did not match those gains, easing slightly over the day to 69.17 US cents.
IAG flags natural disasters in profit update
Insurer IAG announced preliminary, unaudited profit results for the financial year to June 30, with an increase in natural disaster costs one notable item.
IAG's net natural-peril costs are expected to be $1.12 billion — a $354 million blowout from the insurer's original allowance of $765 million.
This is not only due to the unprecedented waves of flooding in Australia's east, but also the rising cost of repairs and replacement of damaged homes, cars and household goods.
The company's chief executive, Nick Hawkins, said IAG had beefed up its provisions for the current year as a result.
"We have been impacted by claims inflation in our key home and motor portfolios and have significantly increased our natural-perils allowance to help ensure the business can withstand the impact of increasing frequency and severity of natural perils," he noted in a statement to the market.
Despite that impact, IAG is expected to rebound from a $427 million loss in the 2021 financial year to a $347 million profit in 2022.
It has also issued positive guidance, indicating that business and premium growth are offsetting these rising costs.
The company has also benefited from taking $200 million out of its provisions for an ongoing claim by thousands of customers for business-interruption insurance to cover COVID-19 pandemic-related losses.
IAG has reduced its provision, based on some favourable legal outcomes for the insurers in court cases last financial year.
Its shares closed down 1.4 per cent, at $4.21.
Elsewhere on the market, Zip continued its recent rally, rising 13.6 per cent, to 88 cents.
Other big gainers from yesterday also continued rising, such as Telix Pharmaceuticals (+5.5 per cent) and Megaport (+4.3 per cent).
Pointsbet Holdings surged 16.3 per cent, to $3.29, to be the biggest gainer on the ASX 200 on Friday.
ECB surprises with bigger rate rise
Europe was the focus of market attention overnight for several reasons.
The ECB's benchmark deposit rate was raised by a larger-than-expected 50 basis points to 0 per cent — the first time it has not been negative since 2014.
It was the ECB's first rate rise since 2011, but NAB's Tapas Strickland said traders expected it to be one of many.
"The market has brought forward rate hike pricing for the ECB, with some chance of 75 basis points at the next meeting in September and around a 70 per cent chance of another 50-basis-point hike priced for October, but little change in the expected peak in the cycle," he wrote.
Capital Economics' chief European economist, Andrew Kenningham, said he also expected many more rate hikes as the ECB tried to catch up with central banks around the world that were scrambling to raise rates to contain rampant inflation.
"We think this will be the first of a series of hikes by which the ECB will raise the deposit rate to around 2 per cent next year," he wrote.
One potential trigger for such a crisis would be the collapse of former ECB president Mario Draghi's coalition Italian government.
The upheaval — which means there will be an election in the country on September 25 — saw Italian government bonds sold off on fears of another debt crisis for the nation, with the spread, or gap, between Italian and German 10-year bond yields (interest rates) widening to 2.3 percentage points.
However, traders were soothed by another development on the continent, with gas flows resuming from Russia to Germany through the Nord Stream 1 pipeline.
"Indications are the gas flow will restart at 40 per cent of capacity, around what it was before the maintenance shutdown, which is more than the market was expecting," Mr Strickland said.
"Russian President Putin, however, warned flows could yet fall to around 20 per cent as soon as next week.
"After initially falling as much as 8 per cent, European natural gas futures are back to unchanged on the day."
US markets gain again on tech
The technology sector again led US markets higher, with Tesla's better-than-expected results, released just after the close of trade yesterday, pushing the car maker's share price up nearly 10 per cent, to $US815.12.
The tech-heavy Nasdaq index gained 1.4 per cent, to 12,060 points, the broader S&P 500 rose 1 per cent and the Dow Jones Industrial Average climbed 0.5 per cent.
"So far in this bear market rally, the S&P500 is up 9.1 per cent, though is still 16.6 per cent away from its peak," Mr Strickland said.
"Overnight, US telco AT&T said there had been an increase in overdue payments of phone bills."
