ECB talk weighs on euro as stocks and pound fight off gas woes

© Reuters. FILE PHOTO: People pass by an electronic screen showing Japan's Nikkei share price index inside a conference hall in Tokyo, Japan June 14, 2022. REUTERS/Issei Kato/File Photo

By Marc Jones

LONDON (Reuters) - Europe's stock markets and Britain's pound both clawed higher on Tuesday as the rampant surge in gas prices stalled, though it could not stop bond market borrowing costs rising again or save the Japanese yen from a new 24-year low.

The mood was notably calmer after Monday's spooked reaction to Russia's latest gas cuts. Wall Street was expected to reopen with a post-holiday spring in its step [.N], talk of 50 basis point rather that 75 basis point European Central Bank rate hike on Thursday helped too, but the energy crisis still smarted.

The euro was sliding again having failed to get back above parity against the dollar [/FRX]. The STOXX 600's bounce remained a modest 0.5%, while a dip in euro zone bond yields sparked by the ECB chatter did not stop U.S., British and other European ones from climbing again. [GVD/EUR]

"Maybe it's natural that we take a bit of a breather here, but it's hard to see where the good news will come from," Abrdn investment director James Athey said.

Russia's gas would remain the "Damocles sword" hanging over Europe's economy, he added, while the scale of interest rate rises likely to come and the risk of recessions was still not fully reflected.

"We are still in a strong dollar, weak risk environment for the foreseeable future," Athey said.

Sterling, which has been one of world's weakest major currencies over the last month, rose 0.5% as Liz Truss's installation as new UK prime minister fed expectations of a big energy relief package there.

U.S. stocks looked set to open around 0.5% higher [.N] as well after Monday's Labor Day holiday, while China's yuan had popped off a more than two-year low against the dollar overnight after Beijing's latest stimulus effort had cut foreign exchange reserves requirements again.

The main Asian stock markets had barely budged however. MSCI's gauge of Asia-Pacific stocks outside Japan finished 0.02% down and Tokyo's Nikkei ended almost exactly where it started.

Yen sellers had continued to hog all the action, sending the currency to another 24-year low of 142 against the dollar.

Moves in other crosses were even more stark. The euro jumped as much 1.2% to 141.2 yen and sterling gained a hefty 1.6% to 164.45 yen. (Graphic: Europe's currencies have been falling for over a year, https://fingfx.thomsonreuters.com/gfx/mkt/mypmnzgyevr/Pasted%20image%201662454766609.png)

AUSTRALIA HIKES RATES AGAIN

In contrast, the Aussie dollar sagged to US$0.67 after the Reserve Bank of Australia lifted its interest rate by another 50 basis points. It signalled more were to come, with the caveat it was not on a pre-set path.

"After we saw the break of 140 (for dollar/yen) ... the momentum definitely was skewed for yen weakness," said Galvin Chia, a strategist at NatWest Markets.

"So long as (yield curve control) is in play, and so long as interest rate divergence is in place, one of those side effects would be a weaker yen."

The ECB is widely expected to lift rates sharply when it meets on Thursday, while the next U.S. Federal Reserve rate decision comes on Sept. 21 and European energy ministers are due to hold an emergency gas crisis meeting on Friday.

European benchmark natural gas prices were down around 10% on the day, but they had gone up as much as 30% on Monday and at 222 euros per megawatt-hour, they are almost five times the level they were a year ago.

Moody's (NYSE:MCO) analytics EMEA chief economist, Gaurav Ganguly, said that Germany, France, Spain and Italy were likely to spend around 50 billion euros on support measures on average, while Britain might spend as much as 100 billion pounds with Truss in charge.

"You would expect the debt burden to increase, but a lot will depend on what happens with the gas price and whether electricity prices can be decoupled from that," Ganguly said,

Deutsche Bank (ETR:DBKGn) strategist Jim Reid pointed out that markets were also now pricing in not only a 75 bps rate hike from the ECB on Thursday but also two more half-point moves by the end of the year, which would mark its fastest ever lifting of borrowing costs.

Back in the commodity markets, oil prices slipped over 2.5%, after the previous session's 3% gain. A deal among members of the OPEC+ group to cut output by 100,000 barrels per day in October had been seen by traders as largely symbolic.

Brent crude futures fell to $92.89 a barrel, widening morning losses. U.S. crude futures were down a more modest 0.3% though at $86.57 a barrel and gold was little changed at $1,710 an ounce.