Stocks steadier as euro leaps on likely rate hikes

[May 23, 2022]  By Huw Jones

LONDON (Reuters) - Stocks kept just above bear market terrain on Monday while the euro leapt after the European Central Bank said it was likely to lift its deposit rate out of negative territory by September.

Oil prices rose, gold extended its recent gains, but the dollar slipped further as investors cut their bets on further advances in the U.S. currency from rising U.S. interest rates.

The MSCI all country index was up 0.3%, though still down around 18% from its record high in January.

S&P 500 futures were up 0.7%, while Nasdaq futures gained 1%, indicating a firm open in New York.

Investors were relieved that the S&P 500 index ended on Friday just clear of bear market territory, meaning down 20% from its Jan. 3 record high close.

But the S&P index had still suffered its seventh successive weekly fall for the first time since the dotcom bubble burst in 2001, Deutsche Bank said in a note.

"For what it's worth the Dow saw the first successive 8th weekly decline since 1923 which really brings home the state of the current sell-off," Deutsche Bank said.

The focus in Europe was on ECB President Christine Lagarde, who accelerated an already sharp policy turnaround from all but ruling out rate hikes to now pencilling in several in the face of record-high euro zone inflation.

 

The prospect of higher rates sent the euro up as much as 1.1% to $1.0687. The single currency has risen 3.3% since hitting a multi-year low on May 13.

"The doves are throwing in the towel," said Holger Schmieding of Berenberg bank, adding that he expects ECB rate hikes of 25 basis points in July, September and December.

The STOXX index of 600 European companies rose 0.6% to 433 points, down about 13% from its January record high.

A survey from the Ifo institute on Monday showed that German business morale unexpectedly rose in May, helping to calm investors for now, at least.

"I don't think we have reached rock bottom yet, it's a bear market rally. The market is still pretty concerned about sticky inflation," said Michael Hewson, chief markets analyst at CMC Markets.

"We believe markets will remain turbulent until investors get greater clarity on the 3Rs - recession, rates and risk," added Mark Haefele, chief investment officer at UBS Global Wealth Management.

The World Economic Forum holds its first in-person meeting in two years in Davos, Switzerland over the coming four days, with central bankers and the International Monetary Fund participating in panels on the outlook for economies and inflation.

 A man shelters under an umbrella as he walks past the London Stock Exchange in London, Britain, August 24, 2015. REUTERS/Suzanne Plunkett

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PEAK DOLLAR?

The dollar index, which tracks the U.S. unit against a basket of currencies of other major trading partners, was down 0.7% at 102.19. The index rose by about 16% to a two-decade high over the 12 months to mid-May.

"The dollar may be carving out a peak, given Europe's resilience to the energy shock and potential easing of lockdowns in China," said Commonwealth Bank of Australia strategist Joe Capurso.

The benchmark 10-year Treasury yield rose to 2.8243% from its U.S. close of 2.787% on Friday. Euro zone government bond yields also edged higher.

The two-year yield, which rises with traders' expectations of higher Fed fund rates, rose to 2.6099%.

Asian stocks fell as investors worried inflation and rising interest rates would hamper the global economy's performance.

MSCI's broadest index of Asia-Pacific shares outside Japan was slightly weaker.

U.S. crude gained 0.8% to $111.25 a barrel as the peak U.S. holiday season driving looms. Brent crude rose 0.9% to $113.64 per barrel.

The concerns over global economic growth have prompted renewed support for gold.
 

"Gold prices saw the first weekly gain since mid-April as safe-haven demand was boosted by concerns over economic growth amid high inflation," ANZ analysts said in a research note on Monday. "A weaker U.S. dollar has also boosted investor appetite."

Spot gold was 0.8% higher at $1,861 per ounce. [GOL/]

(Editing by Sam Holmes and Emelia Sithole-Matarise)

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