By Huw Jones
LONDON (Reuters) – Stock markets and the euro held their ground on Thursday with investor nerves steadied by the resumption of Russian gas supplies to Europe as they waited for what is expected to be the European Central Bank’s first interest rate hike in 11 years.
The flow of Russian gas resumed to Germany after a 10-day outage, easing fears of a potential blow to the European economy if gas supplies have to be rationed. (Full Story) (Full Story)
After an early wobble following the resignation of Italian Prime Minister Mario Draghi, the euro EUR=EBS edged up, distancing itself further from last week’s parity against the greenback and bolstered by expectations the ECB might deliver a big 50 basis-point rate hike.
Russian President Vladimir Putin has warned that gas supplies could be reduced further or even stop, prompting the EU to tells its members to cut usage.
“European markets are going to be pulled and pushed by Putin’s mood,” said Michael Hewson, chief markets strategist at CMC Markets.
Markets are looking to see how much the ECB will raise interest rates later at 1215 GMT on Thursday, with a 25 basis point (bps) hike already priced in, Hewson said. (Full Story)
Traders also await details of an ECB tool to contain stress in bond markets, made all the more urgent by a crumbling government in Italy, one of the euro zone’s most indebted countries. FRX/
Rate hikes from the U.S. Federal Reserve next week and from the Bank of England in August are also well anticipated by now, Hewson said.
The STOXX index .STOXX of 600 European companies was up 0.18%, recovering from the morning’s losses as U.S. stock index futures moved higher. The MSCI All-Country stock index .MIWD00000PUS was flat.
Italian bonds IT10YT=RR sold off sharply following the collapse of Mario Draghi’s government in the euro area’s third biggest economy.
The Italian banks index .FTITLMS3010, a sector sensitive to political crises, fell 4%.
Nadege Dufosse, head of cross-asset strategy at Candriam, said political turmoil in Italy is putting more pressure on the ECB to have its so-called anti-fragmentation tool in place to cap bond yields and reassure markets.
“I think they will have to deliver on that point, I think it’s the main risk today. It must convince investors that it will be efficient,” Dufosse said.
After the latest series of rate hikes, investors will be trying to gauge whether the economy is headed for a soft or hard landing as higher borrowing costs are absorbed, she said.
“It’s the expectations for the fourth quarter or next year that can really determine the trend in the market. For now we do not have the answer and we just have to be very pragmatic,” Dufosse said.
Bucking the trend, the Bank of Japan left its super-loose monetary policy unchanged on Thursday, as expected, and raised its inflation forecasts a little bit. The yen JPY=EBS held steady at 138.37 per dollar. (Full Story)
Nasdaq 100 futures NQc1 were up 0.15%, with S&P 500 futures EScv1 pared nearly all of their earlier losses. Earnings from Blackstone, Dow Chemical, Philip Morris International, Twitter and American Airlines were due on Thursday.
CRUDE EXTENDS LOSSES
Oil prices fell for a second straight session, as demand concerns outweighed tight global supply after U.S. government data showed tepid gasoline consumption during the peak summer driving season.
Brent crude LCOc1 was down 4% at $102.63 a barrel, while U.S. West Texas Intermediate CLc1 dropped 4% to $95.72 a barrel.
Wall Street indexes rallied overnight but even better-than-expected results from Tesla TSLA.O after hours couldn’t carry the positive mood into the Asia session.
MSCI’s broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS fell 0.1% and Japan’s Nikkei .N225 gained 0.4%.
A cloud over Chinese growth due to its strict COVID-19 controls and more trouble in its ailing property market is also casting gloom over the prospects for global demand.
Growth-sensitive commodities such as copper SCFc1 and iron ore SZZFc1 have been sliding and this week Chinese banks and property stocks have been hurt by borrowers boycotting mortgage payments on unfinished homes. (Full Story)
“Past due mortgages doubled over the week, and … potential home buyers are waiting for a general drop in home prices for the housing market, including completed projects,” ING analysts said in a note to clients on Thursday.
“This is negative even for cash-rich developers.”
China’s yuan CNY=CFXS was slightly firmer at 6.7664 to the dollar. Against other currencies the greenback steadied after dipping earlier in the week. The Australian dollar AUD=D3 bought $0.68650.
The benchmark 10-year Treasury yield US10YT=RR held at 3.0508%, up slightly, but still below the 2-year yield US2YT=RR of 3.2380%, a market signal that often presages a recession. US/
(Additional reportig by Tom Westbrook, Editing by Sam Holmes, Kim Coghill and Nick Macfie)