Russian gas flow lifts euro ahead of ECB rate meeting

LONDON (Reuters) – Stock markets fell on Thursday as the resumption of Russian gas supplies to Europe lifted the euro ahead of the European Central Bank’s first expected interest rate hike in more than a decade to curb inflation.

Russian gas flows to Germany have resumed after a 10-day break to ease European supply concerns for now, helping to allay concerns about the fallout on the economy. Read more

The euro rose, pulling itself away from parity last week against the dollar, recovering from expectations that the European Central Bank could raise interest rates by 50 basis points.

Russian President Vladimir Putin has warned that supplies could fall further or even stop, prompting the European Union to tell its members to cut off use.

“European markets will be affected and driven by Putin’s mood,” said Michael Hewson, chief markets strategist at CMC Markets.

Hewson said markets are looking to see how much the European Central Bank will raise interest rates later at 1215 GMT on Thursday, with the rate already raised by 25 basis points. Read more

Traders are also awaiting details of the European Central Bank’s tool to contain pressure in bond markets, which has been made all the more urgent by the collapse of the government in Italy, one of the most heavily indebted countries in the Eurozone.

Hewson said rate hikes from the US Federal Reserve next week and the Bank of England in August are now well expected.

STOXX . indicator (.stoxx) Among the 600 European companies, it fell 0.4%. MSCI All-Country Stock Index (.MIWD00000PUS) down 0.14%.

Italian bonds sold off sharply in the wake of the collapse of Mario Draghi’s government in the eurozone’s third largest economy. Read more

Nadege Dufosse, head of cross-asset strategy at Candriam, said the political turmoil in Italy is putting more pressure on the European Central Bank to put in place a so-called anti-retail tool to limit bond yields and reassure markets.

“I think they’re going to have to make that point, and I think it’s the main risk today,” Dufus said. “You have to convince investors that it’s going to be effective.”

She said that after the latest series of interest rate increases, investors will try to gauge whether the economy is heading for a soft or hard landing while absorbing higher borrowing costs.

“It is the outlook for the fourth quarter or next year that can determine the prevailing trend in the market. At the moment we don’t have an answer and we just have to be very realistic,” Dufus said.

Contrary to this trend, the Bank of Japan left monetary policy unchanged on Thursday, as expected, and raised inflation expectations slightly. The yen settled at 138.37 against the dollar. Read more

Nasdaq 100 futures were down 0.25% and S&P 500 futures were down 0.2%. Earnings from Blackstone, Dow Chemical, Philip Morris International, Twitter and American Airlines were due on Thursday.

China clouds

Wall Street indices rose overnight, but better-than-expected results from Tesla after hours could not carry the positive mood in the Asian trading session. Read more

MSCI’s broadest index of Asia Pacific shares outside Japan (MIAPJ0000PUS.) Japan’s Nikkei fell 0.1%. (.N225) 0.4% profit.

A cloud over Chinese growth due to its tight controls on the COVID-19 virus and new concerns about a faltering real estate market are also casting a shadow over the outlook for global demand.

Growth-sensitive commodities such as copper and iron ore fell, and Chinese banks and real estate stocks were hit this week as borrowers boycotted mortgage payments on unfinished homes. Read more

“Overdue home loans doubled during the week… Potential home buyers are waiting for an overall decline in home prices in the housing market, including completed projects,” ING analysts said in a note to clients on Thursday.

“This is a negative even for rich developers.”

The Chinese yuan rose slightly at 6.7664 to the dollar. The dollar was stable against other currencies after falling earlier in the week. The Australian dollar bought 0.68650 dollars.

The benchmark 10-year Treasury yield settled at 3.0415%, below the two-year yield of 3.2359%, an often-recessionary signal in the market.

Oil prices fell for the second consecutive session, as demand concerns overshadowed tight global supply after US government data showed tepid gasoline consumption during the peak summer driving season.

Brent crude fell 2.25% to $104.50 a barrel, while US West Texas Intermediate crude fell 2.6% to $97.32 a barrel.

Additional reporting by Tom Westbrook, Editing by Sam Holmes, Kim Coogill and Nick McPhee

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