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GLOBAL MARKETS-Stocks, euro slip as ECB set to join rate hike club

reuters.com · 06/09/2022 10:21
GLOBAL MARKETS-Stocks, euro slip as ECB set to join rate hike club

Europe gets signal of first ECB rate rise in a decade

Yen stuck at 20-year low against dollar

China shares stumble on Shanghai's new COVID-19 curbs

Oil hovers at $123 a barrel

Graphic: Global asset performance http://tmsnrt.rs/2yaDPgn

Graphic: World FX rates http://tmsnrt.rs/2egbfVh

By Marc Jones

- Benchmark European borrowing costs hit an 8-year high on Thursday and the euro fell as the European Central Bank signalled it will hike euro zone interest rates next month for the first time in a decade.

While the ECB's decision was widely expected by the markets for weeks, the possibility of a larger increase in interest rates from September weighed on sentiment at a time when the eurozone economy is grappling with slowing growth and soaring inflation. nL1N2XW0AB

“Markets currently point to an ECB policy rate peaking above 2%. We think this would make monetary policy restrictive, and doubt that the euro region’s economy could sustain such tight conditions, given its present challenges," said Bill Papadakis, a macro strategist at Lombard Odier.

Bond dealers marked the moment by pushing Germany's 10-year government bond yield - the main proxy for European borrowing rates - to its highest level in nearly eight years at 1.41%.

Stocks, including banking shares which should be the primary beneficiary of higher interest rates, weakened and the euro EUR=EBS fell a quarter of a percent .EU /FRX

With euro zone inflation at a record-high of 8.1% and broadening quickly, the ECB had already flagged a series of moves, including ending its long-running asset buying programme at the end of this month. Details were crucial though.

It spelled out that it plans to raise rates a quarter point next month and probably half a point in September, which would be the first 50-basis-point move in 22 years. nF9N2UZ02K

“I think in times of great uncertainty, gradualism is probably appropriate, more so than if the path is clear, well-identified and we all understand where we are heading,” ECB President Christine Lagarde said.

The ECB also published new forecasts that raised its inflation projections to 6.8% for this year from 5.1% previously but it cut its growth outlook to 2.8% from 3.7% due to the impact of sky-high energy and food prices.

European stocks were already on the defensive, led by miners .SXPP as China imposed new COVID lockdown measures in Shanghai nL1N2XW01L, while the financials sector .SXEP fared marginally better with banks soon able to charge higher lending rates. nL1N2XV1N0.EUO/R

Asian stocks had fallen overnight and Wall Street futures were broadly flat ESc1.N, although it was more to do with the renewed rise in both global bond yields and the dollar, which will ultimately mean tighter financial conditions.

MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS was closing down 0.5%, with Australian shares .AXJO finishing down 1.4% and Seoul's KOSPI .KS11 flat. Hong Kong's Hang Seng .HSI turned around from small gains to fall 0.7% and Chinese A-shares fell 1%. .CSI300

"It's classic pre-central-bank-meeting price action," Matt Simpson, senior market analyst at City Index in Sydney, said. nL1N2XW0AB

"It's the most exciting meeting since (Christine Lagarde) has been at the helm, since Draghi was here - 'whatever it takes'," Matt Simpson, senior market analyst at City Index in Sydney, said referring to the ECB meeting.


The other major focus for global investors was on the backsliding Japanese yen, which dropped to a 20-year low against the dollar of 134.56 JPY= before regaining a little ground. It is also nearing crucial levels against China's yuan which are highly sensitive for Asia.

The Japanese currency has been weighed down by a widening policy divergence, with the Bank of Japan remaining one of the few global central banks not signalling higher interest rates at present. FRX/

The global dollar index =USD, which is up nearly 7% this year, was holding steady at 102.38, and the euro was at $1.0738 EUR= and testing 1.05 against the neighbouring Swiss franc.

The U.S. 10-year yield US10YT=RR ticked up on Thursday to 3.0585% from a U.S. close of 3.029% on Wednesday and the two-year yield US2YT=RR climbed to 2.815% compared with a U.S. close of 2.774%.

As investors digest the size and pace of ECB tightening in the coming months, they are also awaiting U.S. consumer price data on Friday which the White House has said it expects to be "elevated". Economists expect annual inflation to be 8.3%, according to a Reuters poll.nW1N2WC04A

Oil prices were hovering near three-month highs at $123 a barrel in the commodity markets. On Wednesday, the Dow Jones Industrial Average .DJI fell 0.81%, the S&P 500 .SPX lost 1.08% and the Nasdaq Composite .IXIC dropped 0.73%.

Global assetshttp://tmsnrt.rs/2jvdmXl

Global currencies vs. dollar http://tmsnrt.rs/2egbfVh

Emerging marketshttp://tmsnrt.rs/2ihRugV

MSCI All Country World Index Market Caphttp://tmsnrt.rs/2EmTD6j

Markets bet ECB will hike interest rates fasthttps://tmsnrt.rs/3wyGSyy

Euro zone inflation is at record highshttps://tmsnrt.rs/3NZ4ZgG

(Additional reporting by Andrew Galbraith in Shanghai, Editing by Raissa Kasolowsky, Catherine Evans, Andrew Heavens and Jane Merriman)

((marc.jones@thomsonreuters.com; +44 (0)20 7513 4042; Reuters Messaging: marc.jones.thomsonreuters.com@reuters.net Twitter @marcjonesrtrs))

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