Europe waits on potentially record ECB rate hike

By Marc Jones

LONDON (Reuters) – Stocks and bond yields shuffled higher while the euro perched at parity on Thursday as investors waited to see if the European Central Bank would fight runaway inflation with a record interest rate hike of 75 basis points or go smaller.

A drop in oil below $90 a barrel, growing speculation about Japanese FX market intervention and details of a costly new UK energy price plan meant traders had plenty on their plates before the ECB’s 1215 GMT decision.

The pan-European index rose a modest 0.2% as cyclical sectors including miners, banks and insurers that benefit from higher interest rates gained between 1.0% and 1.1%. ()

Bond and currency markets showed little definitive direction though. The euro wilted back under 1-to-1 to the dollar following its 15% slump this year [/FRX], while government bond market yields turned higher again after an initial move lower. [GVD/EUR]

Paul Hollingsworth, chief European economist at BNP Paribas (OTC:) Markets 360, said that markets were largely expecting an ECB hike of 75 basis points following recent signals from some of its top policymakers.

“The fact that we are not at the peak of inflation in Europe yet is important here,” Hollingsworth said.

“If they do deliver the 75 bps, it is likely that we will see more hikes priced in and we could see the euro rally a bit, but we would look to fade that,” he added, due to the upcoming recession and winter energy crisis.

The euro steadied at $1.000 after hitting a 20-year low of $0.9864 earlier in the week.

Britain’s pound was also out of the red again, with new UK Prime Minister Liz Truss announcing a 100 billion pound ($115 billion)-plus package of measures to cap soaring energy bills.

The extra spending has sparked worries about the UK’s debts, although an energy price cap could at least bring the peak in UK inflation down to 10% from 15%, BNP Paribas’ Hollingsworth estimated.

“The initial thought is one of immense relief,” added Close Brothers Asset Management chief investment officer Robert Alster.

“We knew disposable incomes were going to return to the low levels of the 1980s and there would be a fairly major recession, and this may avert it,” Alster said.

Having hit its lowest level since 1985 on Wednesday, the pound pulled to $1.1543 from $1.1498, although like the euro it is still 15% lower for the year. [/GBP]

FED AHEAD

Overnight, Asian stocks made broad gains as oil prices dropped to levels not seen since Russia’s invasion of Ukraine, though China was an exception as weak data signalled more pressure on the COVID-hit economy.

share average jumped 2.3%, breaking through the psychological barrier of 28,000 points for the first time this month as domestic exporters saw boosts from the weaker yen.

MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.3%, while Australia’s gained 1.7%.

Chinese blue chips fell 0.3%, however, after the release of worse-than-expected trade data on Wednesday and an extension of the lockdown in the city of Chengdu that demonstrated no let-up in the country’s strict zero-COVID policy.

“Today for Asia it’s really a story of whether zero-COVID will continue to impact the Chinese economy, which will of course have a spillover effect in terms of imports,” said Gary Ng, senior economist at Natixis in Hong Kong.

Markets were also awaiting a speech by Federal Reserve Chairman Jerome Powell later in the day for signs of any let-up in the U.S. central bank’s approach to tackling its rising inflation.

CME Group’s (NASDAQ:) Fedwatch tool currently shows that expectations for a third successive rate hike of 75 basis points are at about 76%, up from 69% a week ago.

“The markets will probably adopt a wait-and-see approach in the short run,” said Ng. “Whether it’s 50 or 75 basis points will be important, but the most important thing is really about whether inflation can peak, and what is the rate hike path of the Fed going forward?”

The yen was hovering just below 144 per dollar after weakening almost as far as 145 overnight.

Japan is ready to take action to deal with swift moves in the yen, Deputy Chief Cabinet Secretary Seiji Kihara said on Thursday, repeating the government’s verbal warnings as the currency hovered around 24-year lows.

“We’re worried about rapid and one-sided moves in the currency market,” Kihara told a news conference. “If such moves continue, we would like to take necessary action,” he said, fanning speculation of possible FX market intervention.

The , which tracks the greenback against a basket of currencies of other major trading partners, was up slightly at 109.73.

Oil prices recovered slightly from an overnight plunge but remained below $90 a barrel for the first time since early February on worries about global recession risks. was down 0.5% to $81.51 a barrel while drifted back to $87.38 per barrel in early European trading.

(Additional Reporting by Sam Byford in Hong Kong; Editing by Raissa Kasolowsky and Mark Porter)

Published at Thu, 08 Sep 2022 12:01:29 -0700