LONDON (Reuters) – World stocks slipped from 18-month peaks and the dollar pushed higher on Thursday as traders readied for what is expected to be the eighth straight rate hike from the European Central Bank (ECB) later.
Europe’s groggy start came after Wednesday’s first pause in the U.S. Federal Reserve’s rapid hiking cycle in over a year was offset by an unexpected signal from the bank’s policymakers that another two rises could still come this year.
Dealers reacted by pushing both U.S. and German 2-year bond yields, which drive global borrowing costs, to their highest levels since March at 4.8% and 3.1% respectively.
London, Paris and Frankfurt blue-chips dipped by around 0.2% (EU), while the dollar clambered off a 4-week low against the other major world currencies as Japan’s yen took a tumble ahead of a central bank meeting there on Friday.
“I expect the ECB will raise rates 25 bps (basis points) and end the reinvestment by the (COVID era) asset purchase programme in July,” said Bill Campbell, a portfolio manager at DoubleLine Capital.
ECB President Christine Lagarde’s press conference, meanwhile, will focus on sticky core inflation “which will keep an additional hike in July on the table” and mean another is possible in September if financial conditions don’t become too restrictive, he added.
The Fed’s pause was its first in 10 consecutive meetings. It left its benchmark funds rate window at 5-5.25%. The predicted ECB hike later would take euro zone rates to a two-decade high of 3.5%.
Hawkishness wasn’t the day’s full story though. Overnight, China’s central bank cut another of its key policy rates amid fresh signs its giant economy is spluttering again.
That saw the yuan hit a six-month low of 7.18 to the dollar before a late bounce, while hopes of more stimulus saw stocks in Hong Kong and Shanghai close up more than 1.5% and 2% respectively. (HK)
With the Bank of Japan (BoJ) looking likely to stick with its ultra-easy monetary policy on Friday, the yen also fell to six-month low, with a 1% drop to 141.50 per dollar.
“Dollar-yen is at year highs and markets are increasingly beginning to talk about whether a further rise could trigger the BoJ to verbally and also effectually intervene in the FX market,” Danske Bank’s head of FX research Kristoffer Kjær Lomholt said.
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MSCI’s broadest index of Asia-Pacific shares outside Japan ended up around 0.7% at a two-month high, while Japan’s tearaway Nikkei held at a three-decade peak. (T)
S&P 500 futures were flat, though, and MSCI’s 47-country global index was fractionally lower following five straight days of gains.
“The Fed is being pretty steadfast,” said Bart Wakabayashi, branch manager at State Street (NYSE:STT) in Tokyo, which has brought back the contrast with stimulatory Japan to the fore.
“They point at inflation, the labour market and wages and say look we want (inflation) at 2% and whether it’s 6% or 5% or 5.5% it’s still not at 2% – they’re going to do what they need to do to get that down to 2%.”
Fed funds futures pricing didn’t budge much in the wake of the meeting, but expectations for a hike next month firmed a little and traders pushed any hopes for cuts deeper into 2024.
Elsewhere those hopes and strong Australian jobs data leant support to the Aussie dollar, which was firm at $0.6822, while the New Zealand dollar was on the ropes after data showed the economy shrank into recession this year.
Brent oil was a steady at $73.29 a barrel while gold, which pays no income, dipped to a two-week low of $1,934 an ounce. [O/R][GOL/]
