Euro holds steady as ECB gives a ‘trigger’ signal

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  • Europe receives signal of first ECB rate hike in a decade
  • The yen stabilized at its lowest level in 20 years against the dollar
  • Chinese stocks tumble as Shanghai sees new COVID-19 restrictions
  • Oil is hovering at $123 a barrel
  • Graphic: global asset performance

LONDON (Reuters) – Record European borrowing costs hit an 8-year high on Thursday but the euro and equities held steady as the European Central Bank indicated it would raise interest rates in the euro zone next month for the first time in a decade. .

Besides the 20-year low for the Japanese yen, there was nothing else worth focusing on. How quickly the European Central Bank will raise interest rates in the eurozone from zero has dominated attention for months, coming as part of the most widespread tightening of global monetary policy in more than two decades. Read more

Bond traders seized the moment by pushing the German 10-year government bond yield – the main proxy for European borrowing rates – to its highest level in nearly eight years at 1.41%. Stocks started to slide again. The euro is hardly budging. / FRX

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With inflation in the eurozone hitting a record 8.1% and expanding rapidly, the European Central Bank has already announced a series of moves, including ending its long-running asset purchase program at the end of this month. The details were crucial though.

It has made clear that it plans to raise rates by a quarter point next month and perhaps a half point again in September, which would be the first 50 basis point move in 22 years. Read more

“Rate hikes were achieved in July and in the fall,” said Robert Alster, chief investment officer at Close Brothers Asset Management, Robert Alster, adding that the ECB was relatively late to the rate hike “party”.

“We do not expect further aggressive tightening while the war in Ukraine continues to weigh on morale.”

The European Central Bank also published new forecasts that raised its inflation forecast to 6.8% for this year from 5.1% previously, but lowered its growth forecast to 2.8% from 3.7% due to the impact of soaring energy and food prices.

Reuters Graphics Reuters

With the start of the new European Central Bank conference after the meeting, miners led small but widespread losses in European stocks (.SXPP) As China imposes new COVID lockdown measures in Shanghai Read more while the financial sector (.sxep) They did marginally better as banks were soon able to impose higher lending rates. Read more

Asian stocks fell overnight and Wall Street futures were broadly flat, although it has more to do with a renewed rally 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.) It was closing down 0.5%, with Australian shares (.AXJO) Ended down 1.4% and Kospi in Seoul (.KS11) flat. Hang Seng in Hong Kong (.HSI) It turned from a small gain to a 0.7% drop and Chinese A shares fell 1%. (.CSI300)

“It’s a classic price action ahead of the central bank meeting,” said Matt Simpson, chief market analyst at City Index in Sydney. Read more

“It’s the most exciting meeting since (Christine Lagarde) has been at the helm, since Draghi has been here – ‘whatever it takes’,” said Matt Simpson, chief market analyst at City Index in Sydney, referring to the ECB meeting.

low yen

Another major focus for global investors was on the decline of the Japanese yen, which fell to a 20-year low against the dollar at 134.56 before regaining strength a bit. It is also approaching critical levels against the Chinese yuan, which is highly sensitive to Asia.

The Japanese currency has come under great pressure due to the widening policy divergence, with the Bank of Japan remaining as one of the few global central banks not signaling a rate hike at the moment.

The global dollar index, which is up about 7% this year, settled at 102.38, the euro was at $1.0738 and a test of 1.05 against the neighboring Swiss franc.

The US 10-year yield on Thursday rose to 3.0585% from the US close of 3.029% on Wednesday and the two-year yield rose to 2.815% compared to the US close at 2.774%.

Adding to concern about European inflation, data this week showed that the euro zone economy grew faster in the first quarter of the previous three months, despite the war in Ukraine. Read more

As investors digest the scale and speed of the European Central Bank’s tightening in the coming months, they are also waiting for US consumer price data on Friday which the White House said it expects to be “up”. Economists expect an annual inflation rate of 8.3%, according to a Reuters poll. Read more

Oil prices were hovering near three-month highs of $123 a barrel in the commodity markets. On Wednesday, the Dow Jones Industrial Average (.DJI) The S&P 500 fell 0.81%. (.SPX) The Nasdaq Composite lost 1.08% (nineteenth) It decreased by 0.73%.

“Over the past two weeks, trading has been in a very narrow range and has also relied on very low volumes,” analysts at ING said in a note.

They warned that “previous cases of this range of trading in low volumes usually precede a sharp bearish turn,” adding that the European Central Bank meeting and US price data on Friday were likely “catalysts for a more bearish outlook.”

Inflation in the euro area has reached record levels
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Additional reporting by Andrew Galbraith in Shanghai; Editing by Raisa Kasulowsky, Catherine Evans and Andrew Heavens

Our criteria: Thomson Reuters Trust Principles.

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