The euro rallied and short-dated eurozone government debt came under pressure on Tuesday, as traders braced themselves for the bloc’s central bank to lift interest rates for the first time in more than a decade.
The common currency rose 0.8 per cent to slightly more than $1.02, after sliding to dollar parity last week for the first time in 20 years as the greenback strengthened and as concerns intensified over Europe’s dependence on Russian energy.
In government bond markets, the yield on Germany’s policy-sensitive two-year bond rose 0.08 percentage points to 0.59 per cent. The yield on the 10-year German Bund, seen as a proxy for eurozone borrowing costs, rose 0.03 percentage points to 1.25 per cent. Bond yields rise as their prices fall.
The European Central Bank has widely signalled that it will on Thursday raise its main deposit rate, currently at minus 0.5 per cent, for the first time since 2011.
Markets on Tuesday morning contemplated the possibility of an extra-large 0.5 percentage point rate increase. The ECB has kept its main interest rate at less than zero to stimulate lending and spending since 2014, when the eurozone faced a sovereign debt crisis, and has lagged behind the US Federal Reserve and the Bank of England in tightening monetary policy to combat surging consumer prices.
Newswires on Tuesday reported that the ECB may consider raising borrowing costs this week by a half-point, rather than 0.25 percentage points, against a backdrop of red-hot inflation.
“The fact is that the ECB is a long way behind the curve and they have a lot to do,” said Paul O’Connor, head of the UK-based multi-asset team at Janus Henderson. “So it won’t seem unusual if they kick off with a 50 basis point rise.”
The yield on Italy’s two-year bond added 0.07 percentage points to 1.47 per cent.
The eurozone central bank may also on Thursday offer new details about a planned support mechanism to safeguard weaker governments in the bloc, such as those of Italy and Greece, from higher rates.
In equity markets, Europe’s regional Stoxx 600 share index dropped 0.2 per cent, following two days of gains after US retail sales data indicated that the Fed’s rate rises had not yet affected consumers’ willingness to spend.
Futures trading indicated Wall Street’s S&P 500 would edge 0.4 per cent higher at the New York open after it closed 0.8 per cent lower on Monday.
Global stocks have dropped about 20 per cent this year as investors debated central banks’ ability to tame surging inflation without pushing economies into contraction, while the quarterly corporate earnings season has ignited concerns about a potential recession.
Wall Street banks JPMorgan and Morgan Stanley missed analysts’ earnings forecasts last week. On Monday, Goldman Sachs warned it would slow hiring while Bloomberg reported that Apple was about to do the same.
“We are going to see big downgrades to earnings forecasts and there is no monetary policy support to help markets, so it is difficult to be optimistic,” said Luca Paolini, chief strategist at Pictet Asset Management.
“The only thing that might save the situation is an improvement in China.”
As many as 41 Chinese cities are now under lockdowns or district-based controls, Japanese bank Nomura said, as the nation pursues its zero-Covid policy while racing to develop an effective homegrown mRNA vaccine.
China’s economy expanded just 0.4 per cent in the quarter to June year on year, widely missing analysts’ forecasts, although the weak performance fuelled speculation that Beijing would launch stimulus measures.
Hong Kong’s Hang Seng share index closed 0.9 per cent lower, taking its year-to-date loss to 12 per cent.
The Topix in Tokyo gained 0.5 per cent.
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