LDN - Business

Europe turns to ECB after U.S. inflation selloff

[April 11, 2024] By Marc Jones

LONDON (Reuters) - Stocks and the euro were steady ahead of an European Central Bank meeting on Thursday, after stubborn U.S. inflation numbers triggered the biggest global market selloff in months and left Japan's yen at a new 34-year low.

Euro traders were feeling especially fragile after Wednesday's surprise U.S. CPI figures sent the dollar on its biggest tear in over a year against the single currency by quashing hopes of near-term Fed rate cut. [FRX/]

Europe's bourses had opened broadly flat in line with MSCI's main global index, with focus on whether ECB chief Christine Lagarde bolsters expectations later that it will start cutting rates in June, thereby opening up a serious wedge with the Fed.

Bond markets were still reeling, meanwhile, after the 10-year U.S. Treasury yield - the main driver of global borrowing costs - had shot back above 4.5%, its biggest daily leap since September 2022. [/US]

Germany's 10-year bond yield - the European benchmark - was up fractionally at 2.45%, after rising 6 bps on Wednesday although that was a small change compared to the 18 bps jump experienced by Treasury traders.

"The key driver now remains U.S. rates," Amundi's Co-Head of Emerging Markets/Fixed Income Sergei Strigo said, pointing to Treasuries braking up through the 4.5% level again.

"The question is whether we are going to stick to these levels or are going to go higher".

For ECB watchers, the bank has kept rates steady since September but has already signaled that cuts are coming into view, with policymakers awaiting a few more comforting wage indicators before pulling the trigger.

The currency bloc is now in its sixth straight quarter of economic stagnation and the labor market is starting to soften, an obvious contrast to the U.S. economy which continues to grow robustly.

"While there are limits to how much ECB policy can diverge from the Fed over time, there is nothing to stop the ECB from cutting first or setting its own pace of cuts early on in the easing cycle," Deutsche Bank's Jim Reid said.

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Japanese yen and U.S. dollar banknotes are seen with a currency exchange rate graph in this illustration picture taken June 16, 2022. REUTERS/Florence Lo/Illustration/File Photo/File Photo

However he also pointed to how markets cut the likelihood of an ECB cut by June back to 82% on Wednesday, down from 91% the previous day. Likewise at the Bank of England, it fell from 74% to 56%, for the Bank of Canada it fell from 78% to 53%, and for the Reserve Bank of Australia it went from 25% to 21%.

INTERVENTION WARNING

U.S. stock futures were little changed after Wall Street had fallen around 1%. Treasuries also steadied after the surge in yields had pushed them to their highest levels since November.

Overnight in Asia, MSCI's broadest index of Asia-Pacific shares outside Japan slipped 0.3%, paring some earlier losses, while Japan's Nikkei dropped 0.5%.

It was the beleaguered yen that was the main focus though, after the roaring greenback knocked the Japanese currency to a 34-year low of 153.24 per dollar.

It eased up slightly to 152.90 yen as the risk of government intervention potentially looms large now. Japan's top currency diplomat, Masato Kanda, warned on Thursday that authorities would not rule out any steps to respond to disorderly exchange-rate moves.

In commodities, metal prices were resilient in the face of a strong dollar while oil held gains after advancing more than 1% following an Israeli strike that killed three sons of a Hamas leader, fuelling worries that ceasefire talks might stall. [O/R]

Brent rose 0.15% to $90.62 a barrel, and U.S. crude was 0.1% higher at $86.33 per barrel. Gold prices gained 0.3% to $2,338.79 per ounce, charging towards record highs, after losing 0.8% overnight.

(Reporting by Marc Jones; editing by Miral Fahmy)

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