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Euro and bond yields firm after ECB holds rates

Thursday 14:30 GMT

Overview

The euro is firmer and Bund yields are trundling higher with Treasuries after the European Central Bank stood pat on interest rates and indicated it was not looking to ease policy further.

Oil prices tried to rally but have resumed their sell-off, putting energy stocks under pressure and weighing on equity benchmarks.

Hot topic (1)

After a period when politicians seemed to rule the market roost — the Trump presidency and French election concerns, for example — the central banks are back.

Monetary policy is in focus with the European Central Bank delivering its strategy decision, and investors adjusting to the prospect of a higher US interest rate environment.

The ECB on Thursday left interest rates at record levels as expected and did not change its quantitative easing programme.

But what about the future of its €2.3tn stimulus? To many analysts, ECB president Mario Draghi potentially faces a difficult task in this regard.

He has to convince the market that a path can be navigated which ensures the weaker parts of the bloc’s economy continue to benefit from his largesse while also assuaging those concerned about signs of bubbling global inflationary pressures. A report on Thursday showed China factory gate prices accelerating at the fastest in eight years, for example.

And that is what he tried to do during his press conference on Thursday. The ECB bumped up its growth and inflation forecasts and Mr Draghi noted that there were signs of a stronger economic recovery globally. However, he made it clear that the central bank will continue with QE until it saw a sustained pickup in inflation. And underlying inflation in the eurozone, he stressed, remains subdued for now.

The euro had been firmer for much of the session and extended its gains after Mr Draghi also said there appeared less urgency to ease policy again. The common currency is up 0.6 per cent to $1.0601 and government bond yields, which move opposite to the price, are moving higher.

German 2-year and 10-year bond yields, are up 2 basis points to minus 0.82 per cent and adding 5bp to 0.42 per cent respectively.

In contrast, similar maturity US government bonds are up 1bp to 1.37 per cent and gaining 3bp to 2.58 per cent. The former is the highest 2-year yield since August 2009, and reflects growing expectations that the Federal Reserve may have to quicken the pace of interest rate rises given evidence of an improving economy.

Data released on Wednesday showed 298,000 private US sector jobs were created in February, 100,000 above forecasts and a figure that suggests the official monthly labour market report on Friday will not only cement expectations for a 25 basis point rate rise by the Fed next week but also makes the chances of another three hikes this year more likely.

Gold tends not to like higher US bond yields, which often deliver a firmer dollar, and so the precious metal is steady at $1,207 — near its cheapest in five weeks.

Hot topic (2)

Oil prices are in retreat after initially trying to recover from a sharp fall in the previous session that was prompted by a report showing US crude inventories surging to a record high.

The size of the sell-off comes as a shock to traders after more than two months of prices holding in a tight range, with the market seemingly finding equilibrium as Opec production cuts were seen being counteracted by the increased output of US drillers.

Indeed moves had been relatively so meagre that the CBOE Oil Vix, a measure of implied market volatility, hit a 30-month trough of less than 25 at the start of March.

Meanwhile, speculators had built up near record futures and options bets that prices would eventually break higher.

This meant that when it was revealed on Wednesday that US stockpiles had risen by 8.2m barrels — four times analysts’ forecasts — the bulls have had to scramble to close their long positions, adding to the selling. The CBOE Oil Vix jumped 20 per cent on the day to 31.7 as trading volumes ballooned.

Brent crude, the international benchmark that lost 5 per cent, is off another 1 per cent to $52.59 a barrel on Thursday. West Texas Intermediate, the main US contract, is following up a 5.4 per cent stumble with a further 0.7 per cent loss to $49.96 a barrel, the first time below the $50 mark since December.

Equities

On Wall Street, the S&P 500 is opening barely changed at 2,262.5, steadying after Wednesday’s 0.2 per cent dip which came as the S&P energy sector shed 2.5 per cent amid the oil price rout.

The pan-European Stoxx 600 is down 0.1 per cent as selling of UK-listed oil explorers and miners pushes the FTSE 100 lower by 0.6 per cent

And energy company shares in Asia fared badly as they played catch-up. Australia’s S&P/ASX 200 lost 0.3 per cent as resources groups weighed, and the same dynamic was a feature of a 1.2 per cent drop for Hong Kong’s Hang Seng.

Tokyo’s Topix is relatively energy-light and so along with the sight of a weaker yen it outperformed with a 0.3 per cent advance, helped by gains in the IT and consumer discretionary segments.

Forex

The dollar’s moves are mixed. The yen is down 0.4 per cent to ¥114.77, near its weakest versus the greenback in five weeks.

Sterling is up 0.1 per cent to $1.2185, but hovering near seven-week lows, as investors reflect on the government’s budget statement and remain concerned by the potential economic fallout of Brexit.

China’s renminbi is resting at its softest level in nearly two months.

Additional reporting by Hudson Lockett in Hong Kong

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