European bond yields soar on tightening talk, U.S. stock futures dip

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[February 07, 2022]    By Carolyn Cohn

LONDON (Reuters) - European bond yields jumped on Monday after the European Central Bank last week drove speculation about monetary tightening as soon as March, while U.S. stock index futures indicated a lower Wall Street open on U.S. inflation and rate hike worries.

 

Markets are on alert for rate rises in both the euro zone and the United States after the ECB last week was considered to have adopted a more hawkish tone. The United States reported stronger than expected jobs and earnings data.

"The most dominant thing is still central banks and the tightening we see there, that has led to the volatility," said Matthias Scheiber, global head of portfolio management at Allspring Global Investments.

German 10-year government bond yields hit three-year highs and Italian 10-year yields hit their highest since May 2020, with Italy seen particularly vulnerable to rate increases due to its high levels of debt. [GVD/EUR]

Two-year U.S. Treasury note yields hit a two-year high and U.S. 10-year yields stayed close to two-year highs hit on Friday.

S&P 500 futures and Nasdaq futures fell around 0.2% after turmoil last week in growth-sensitive tech stocks saw Amazon.com Inc gain almost $200 billion while Facebook-owner Meta Platforms Inc lost just as much.

European stocks were steady, though Italian stocks dropped 1.34%.. Britain's FTSE gained 0.3%.

ECB officials attempted to temper expectations of near-term tightening ahead of comments by President Christine Lagarde later on Monday.

ECB policymaker Martins Kazaks pushed back against market expectations for a rate hike as soon as July in an interview with Reuters. He said the bank could end its stimulus programme earlier than planned but it was unlikely to raise its main interest rate so quickly.

Klaas Knot, the Dutch Central Bank President and a member of the ECB's governing council, said on Sunday he expects a hike in the fourth quarter of this year.

"How much will we have to reprice yields, and spreads between (European) peripheral debt and Bunds, on the back of reduced ECB buying, is a question on much of the market's lips," said Kit Juckes, strategist at Societe Generale.

After a bumpy ride last week, the MSCI world equities index was flat.

The euro inched down 0.11% at $1.1435, having shot up 2.7% last week in its best performance since early 2020 on the tightening expectations.

The U.S. dollar index edged up 0.06% to 95.502, after shedding 1.8% last week.

The U.S. January payrolls report on Friday showed annual growth in average hourly earnings climbed to 5.7%, from 4.9%, while payrolls for prior months were revised up by 709,000 to radically change the trend in hiring.

U.S. consumer price figures for January are due on Thursday and could show core inflation accelerating to the fastest pace since 1982 at 5.9%.

As a result, markets moved to price in a one-in-three chance the Fed might hike by a full 50 basis points in March and the prospect of rates reaching 1.5% by year end.

The Russian rouble recovered to a three-week high against the dollar as French President Emmanuel Macron traveled to Moscow seeking commitments from Russian President Vladimir Putin to dial down tensions with Ukraine, which Western leaders fear the Kremlin plans to invade.

Oil prices fell as much as $1 as signs of progress in U.S.-Iran nuclear talks that could lead to removal of U.S. sanctions on Iranian oil sales offset concerns about tight supplies. [O/R]

Brent crude weakened to $92.90 a barrel, while U.S. crude fell to $91.56.

MSCI's broadest index of Asia-Pacific shares outside Japan dipped 0.14%.

China returned from the Lunar New Year break with jumps in equities and commodities, with the blue-chip CSI300 and Shanghai Composite up 1.54% and 2% respectively and metals and iron ore rallying in Shanghai. [IRONORE/][MET/L]

Gold rose 0.29% to $1,813 an ounce, buoyed by inflation worries.

(Additional reporting by Wayne Cole and Tom Westbrook; Editing by Lincoln Feast and Frank Jack Daniel)

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