SINGAPORE, May 4 (Reuters) – Europe’s stock markets and the euro tumbled on Thursday as investors waited for another rate hike from the European Central Bank after the US Federal Reserve signaled its wandering marathon might finally be taking a break.
Another overnight loss in US regional bank stocks did little to help sentiment, but with gold just a blink of an eye from a record high after a tough few days and oil higher after a tough few days, the focus was naturally on Frankfurt.
Economists polled by Reuters expect the ECB to hike lending rates for a seventh consecutive month, though the consensus is for a smaller quarter-point move rather than the half-point jumps it has been favoring lately.
Matt Ward, portfolio manager on Barings’ global equities team, said the ECB was being watched closely after the Fed did a good job with its quarter-point hike on Wednesday.
“I’m not in the camp of expecting a 50 basis point shock hike, but it’s hard to see anything other than a continuation of the hawkish tone,” he said, citing the set of relatively robust data and low unemployment in key countries like Germany.
That likely ECB tone was evident in bond markets, where benchmark government bond yields, which were driving up borrowing costs across Europe, soared.
It was fractional stuff though. Germany’s 10-year yield rose just 1 basis point to 2.26%, well below where it was a month ago, while Italy’s yield was just 2 basis points higher at 4.152%.
“Pending the decision, which comes at 1215 GMT, we are basically in limbo,” said Piet Haines Christiansen, chief fixed income strategist at Danske Bank.
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The Fed on Wednesday dropped a key line included in its earlier statements about the need for more rate hikes, but Fed Chair Jerome Powell has pushed back against expectations that it will soon start cutting it.
It will “take some time” for inflation to come down, he said, so “cutting rates this year would not be appropriate”.
It also came as another US regional bank, PacWest Bancorp (PACW.O), reported problems and reminded investors of the precarious health of some banks, despite assurances from regulators to contain the crisis that started with the collapse of Silicon Valley Bank and the Signature Bank began march.
“The Fed’s decision was widely expected and therefore didn’t shake financial markets much,” said Tina Teng, market analyst at CMC Markets in Auckland. “However, I think that the overall economic development is not positive, especially the recent bankruptcies of the regional banks.”
APPLE-EYE
Norway’s central bank, which is ahead of the ECB, has raised its benchmark interest rate by 25 basis points to 3.25% as expected, adding that it is likely to be raised again in June and beyond if the Norwegian krone remains weak.
European equities weakened, with the STOXX 600 down 0.5%, led by the auto and tourism sectors.
MSCI’s 47-country index of world stocks also slipped into the red (.MIWD00000PUS), as did Wall Street futures, where tech giant Apple (AAPL.O) was later expected to report earnings.
Asia was more bullish (.MIAPJ0000PUS) although trading was thinned out this week by Japanese bank holidays.
China’s benchmark index (.CSI300) opened weaker as mainland markets rebounded from their May 1st holiday but recovered to end broadly flat.
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US bond markets had rallied after Wednesday’s Fed meeting, as had fed funds futures, with the latter implying a 52 percent chance of a rate cut as early as July.
The Japanese yen rose 0.1% against the greenback to 134.51 per dollar, contributing to its more than 1% gain on Wednesday.
Back in Europe, the euro turned lower after briefly flirting with a one-year high, while the British pound also flattened after hitting a roughly 11-month high of $1.25925 in Asia. /FRX
Mizuho analysts said the excitement over the implied pause in Fed tightening may be overblown and that Fed leaders are “just more thoughtful”.
Brent oil prices rose 1% on Thursday to $72.83 a barrel, but that was just a fraction of their 9% plunge over the past three days.
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Reporting by Rae Wee and Vidya Ranganathan; Editing by Sam Holmes
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