Weak European data hits euro, lifts bonds
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[August 23, 2023] By
Marc Jones
LONDON (Reuters) - Weak European economic data sent the euro lower and
sparked a bounce in bond and share markets on Wednesday, as investors
also awaited results from tech darling Nvidia later to see if the
sector's lofty valuations still look justified.
The euro fell to a more than two-month low of just above $1.08 against
the dollar and a 12-month low against the pound after survey data showed
German and euro area business activity slumped in August. [FRX/]
It was the fastest contraction in German business activity in over three
years and had traders scurrying to firm up bets that the European
Central Bank could now pause what has been a record-breaking run of
interest rate hikes.
That view that borrowing costs may finally be cresting helped lift the
STOXX 600 European share index as much as 0.5% and pushed Germany's
10-year government yield, the euro area benchmark, down to 2.546%, its
lowest since Aug. 10. [GVD/EUR]
"The PMI suggests that it's back to the pre-summer narrative of lower
rates," said Piet Christiansen, chief analyst at Danske Bank.
Christiansen added that euro zone inflation data due next week would
still be key to the ECB's decision.
"There's many indicators that suggest that we could have had the last
hike but if you just look at inflation, which is the (ECB's) key
mandate... that is not a done deal," he added.
Traders scaled back their bets on a ECB September hike and now price in
a roughly 40% chance of a 25 basis point move compared with more than
50% on Tuesday.
Overnight, Asian markets had seen more focus on the weakness in China's
economy and yuan, as well some gloomy factory readings from Japan, which
also left sentiment fragile.
Equity markets were in wait-and-see mode ahead of earnings later from
chip giant Nvidia following its frenzied stock price rise this year on
the back of the boom in artificial intelligence (AI).
Its shares hit an all-time high of $481.87 on Wall Street on Tuesday,
with options data showing traders are expecting a larger-than-usual
swing in shares after the quarterly results which will be published
later.
Analysts expect the firm to forecast 110% growth in third-quarter
revenue to $12.50 billion. Stuart Humphrey, an analyst at JPMorgan, said
some are forecasting $14-15 billion.
"This kind of number feels a touch high to me, but if it sniffs this -
one could argue that into this print, it doesn't matter if demand will
eventually decline next year - (it) still will be re-rated higher,"
Humphrey said.
MSCI's broadest index of Asia-Pacific shares outside Japan had finished
up 0.4%, although it was not far from a nine-month trough hit just two
sessions ago. Japan's Nikkei also rose 0.5%.
Data there showed factory activity shrank for a third straight month in
August, offering the first glimpse into the health of global
manufacturing this month. The United States will also report its flash
PMI readings on Wednesday, which is likely to show the factory sector
remained in contraction.
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The London Stock Exchange Group offices
are seen in the City of London, Britain, December 29, 2017.
REUTERS/Toby Melville/File Photo
The benchmark 10-year Japanese government bond yield hit a new
9-1/2-year peak of 0.675%, as investors took the Bank of Japan's
decision to refrain from intervening to buy bonds as a green light
for further selling.
In China, blue chips failed to hold onto Tuesday's gains, falling
1.3%, while Hong Kong's Hang Seng Index held up better, up 0.3%
after a 1% jump.
Iron ore prices rose 5% to a fresh two-year high on Wednesday, and
coking coal and coke were up more than 3% in the absence of Chinese
government directives to cut steel production.
Wall Street futures also pointed to a bounce having been pressured
on Tuesday by higher bond yields, which hit 16-year highs. The Dow
Jones fell 0.5%, the S&P 500 lost 0.3% and the Nasdaq Composite
added 0.1%.
Financial shares underperformed, with the S&P 500 banks sliding
2.4%, after S&P joined Moody's to downgrade multiple regional U.S.
lenders.
The weak euro zone data meant Treasury yields were also down.
Ten-year yields eased to 4.26% in early European trading, after
touching a 16-year high of 4.36% a session earlier.
A jump in Treasury issuance, Fitch's credit downgrade three weeks
ago and concerns China will dump Treasuries to support the yuan have
added to a sell-off as investors await the Fed's annual summit in
Jackson Hole, Wyoming, later this week for more rate clues.
Comments from Richmond Fed President Thomas Barkin raised
expectations that Chair Jerome Powell would deliver a hawkish
message, after strong U.S. economic data makes the "re-acceleration
scenario" possible.
In currency markets, moves away from the euro were largely muted
ahead of Jackson Hole. The U.S. dollar was at a two month high of
103.8 against a basket of major currencies.
The yen hovered near a nine-month trough at 145.34, amid talks that
Japan will only intervene in the market if the currency plunges past
150 to the dollar.
Oil prices were slightly lower. Brent crude futures dropped 0.75% to
$83.75 per barrel and U.S. West Texas Intermediate crude futures
edged down to $79.14, while gold was 0.3% higher at $1,903 per
ounce.
(Additional reporting by Stella Qui in Sydney and Yoruk Bahceli in
Amsterdam; Editing by Tomasz Janowski)
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