Euro tumbles as ECB vows to keep rate down

The euro fell a full cent against the dollar and government borrowing costs dropped on Thursday, after the European Central Bank vowed not to raise euro zone interest rates before the middle of next year.

The bank said it was pulling the plug on its 2.55 trillion euro stimulus program but after the Federal Reserve raised U.S. interest rates for the second time this year on Wednesday the ECB rate promise came as a relief.

The pan-European STOXX 600 index raced back into positive territory after a morning in the red, though basic resources stocks stayed down more than 1 percent .SXPP after weak data from big metals consumer China. 

Germany's DAX .GDAXI and France's CAC40 .FCHI led the stocks rebound, while the euro tumbled back toward $1.17 from well over $1.18 EUR=EBS [/FRX]. Euro zone government borrowing costs slid too as traders recalibrated prices for a longer period of sub-zero ECB rates.

Germany’s Bunds were offering 0.46 percent compared with 0.49 percent DE10YT=RR before the ECB statement.

U.S. Treasuries meanwhile were down to 2.94 percent US10YT=RR having briefly topped 3 percent overnight after the Federal Reserve had pushed up its interest rates.

The ECB had probably been too slow to reduce stimulus, Samra added, though recent weaker data showed Europe still had underlying issues.

The bank’s chief Mario Draghi holds a news conference at 1230 GMT to explain the decision.
His biggest complication is the increasingly murky economic European outlook, a developing trade war with the United States, a populist challenge from Italy’s new government and softening export demand.

CENTRAL BANK MEETINGS

Investor focus was shifting to the two major central bank meetings later this week. The U.S. Federal Reserve holds a policy meeting on Wednesday, where it is widely expected to deliver its second interest rate hike for the year.

U.S. inflation data due later in the day will also add to speculation over the path for U.S. interest rates later this year. Markets are currently pricing a slightly more than 1 in 5 chance of a fourth interest rate hike by the end of the year.

On Thursday, the European Central Bank meets and some expect the Bank to provide guidance for an ending of its massive bond-buying program at the end of this year.

Due at 0900 GMT is the ZEW index of economic sentiment, which may provide markets a glimpse of whether recent economic data misses in Europe have dented sentiment in corporate Germany.
In currencies, the dollar was 0.1 percent lower against a basket of peers. .DXY

On the safe haven yen, the dollar jumped to a three-week top JPY= of 110.49 in early deals. It was last at 110.25.

Helping calm markets were comments from Italy’s new coalition government that it had no intention of leaving the euro zone and planned to cut debt.

The euro EUR= was just below a three-week high of $1.1840, up 0.1 percent on the day.

In commodities, U.S. crude CLc1 was rose half a percent to $66.39 per barrel, while Brent LCOc1 climbed half a percent to $76.86. Spot gold XAU= slipped 0.2 percent to $1,296.95 an ounce.

Commentary: As eerie calm returns to markets, have investors given up hedging?

Perhaps the most remarkable aspect of what has been a bumpy ride for world financial markets this year is how stubbornly low volatility is. It’s as if investors have given up on hedging, which is exactly what appears to be happening.

Benchmark measures of implied volatility across major stocks, bonds and currency markets are historically low, despite the ECB preparing to join the Fed in tightening policy, Italy’s bond market in turmoil and surging global trade war fears.

If that wasn’t enough, the G7 pantomime at the weekend shows that the rules-based international order that has provided the political and economic framework for financial markets over the last 40 years is facing an existential crisis.

But almost all the recent bursts of volatility, in Turkey, Argentina as well as Italy, have remained localised and the spillover to broader markets has been negligible. Even the S&P 500’s “volmageddon” episode in February was short-lived.

This is partly because, at the macro level, the world economy continues to hum along quite nicely. Global growth is north of 3 percent and there’s little sign of it slowing to any significant degree.

The latest Commodity Futures Trading Commission data show that hedge funds and speculators maintained a short position in VIX futures contracts, essentially betting on lower volatility in the S&P 500 over the coming month.

The net short position was trimmed a bit to 36,189 contracts from 44,380 the week before, but these are figures for the week to Tuesday, June 5. The VIX has since fallen further, trading with an 11 percent handle for the first time since late January.

The VIX index is now at 12.5, below its median over the last five years of 14.6. Only four months ago it had its biggest rise in history on fears that accelerating U.S. wage growth would force the Fed to jack up interest rates far more aggressively than investors had bargained for.

Wall Street set to open flat ahead of U.S.-North Korea summit

U.S. stock futures pointed to a flat open for Wall Street on Monday, as investors looked past a chaotic G7 summit over the weekend and focused on a historic U.S.-North Korea summit.

President Donald Trump threw the G7’s efforts to show a united front into disarray after taking aim at Canadian Prime Minister Justin Trudeau and announcing that he was backing out of the joint communique.

The markets appeared to be calm even as Trudeau spoke of retaliatory measures that Canada would take next month in response to Trump’s decision to slap tariffs on steel and aluminum imports from Canada, Mexico and the European Union.

At 8:47 a.m. ET, Dow e-minis were up 12 points, or 0.05 percent. S&P 500 e-minis were down 0.5 points, or 0.02 percent and Nasdaq 100 e-minis were down 11.5 points, or 0.16 percent.

The escalating clash over trade between Washington and some of its closest global partners cast a cloud over Trump’s efforts to make history in nuclear talks in Singapore on Tuesday with Kim Jong Un of North Korea, one of America’s bitterest foes.

Trump said the summit could “work out very nicely” as officials from both countries met to narrow differences on how to end a nuclear stand-off on the Korean peninsula.

Investors are also bracing for monetary policy changes, with three of the world’s top central banks - the U.S. Federal Reserve, the European Central Bank and the Bank of Japan - set to meet this week.

The Fed is almost certain to raise rates again on Wednesday, inching closer to a neutral policy stance, while the ECB is likely to signal on Thursday that its 2.55 trillion euro bond purchase scheme will end this year, a key move in dismantling crisis-era stimulus.

Among stocks, insurer Genworth Financial’s shares surged 28.3 percent in premarket trading after a U.S. security panel approved China Oceanwide Holdings Group’s [OWREAC.UL] purchase of the insurer.

Shares in Exxon and Chevron fell 0.4 percent and 0.2 percent, respectively, as oil prices fell nearly 1 percent on rising Russian production and the highest U.S. drilling activity in more than three years.

Envision Healthcare jumped 2.5 percent after private equity firm KKR & Co said it would take the physician services provider private in a deal valued at $5.57 billion.

Euro recovers on rising bets ECB may unwind stimulus

The euro stayed near two-week highs against many of its rivals on Thursday, on rising bets the European Central Bank (ECB) may soon announce it will start winding down its massive bond purchase programme.

The central bank’s chief economist Peter Praet, a close ally of President Mario Draghi, said the ECB would debate next week whether to end bond purchases later this year.

Jens Weidmann, the head of Germany’s central bank, said expectations the ECB would taper its bond-buying programme by the end of this year were plausible while his Dutch counterpart, Klaas Knot, said there was no reason to continue a quantitative easing programme.

The trio of comments drove the euro to a two-week high of $1.1800 sharp. The common currency last traded at $1.1781, extending its gains so far this week to 1.15 percent.

The euro strengthened against other currencies, hitting a two-week high of 1.1640 Swiss franc and 129.83 yen on Wednesday.

The ECB has been debating whether to end the unprecedented 2.55 trillion euro ($2.99 trillion) bond purchase programme this year as the threat of deflation has passed.

Still many market players were surprised by the flurry of comments as they had thought uncertainty caused by a political crisis in Italy could make policymakers cautious about indicating an end to stimulus at its policy meeting on June 14.

Indeed, the yield spread of Italian debt to German Bunds widened on Wednesday as Italian bonds are seen as the biggest beneficiary of the ECB’s buying.

Asian shares hit 2-1/2-month high; euro, yields up after ECB comments

Asian shares rose to a fresh 2-1/2-month high on Thursday, supported by sound economic fundamentals, while expectations the European Central Bank (ECB) could start to wind down its stimulus boosted the euro and global bond yields.

MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS advanced 0.4 percent to extend its gains, hitting a 2-1/2-month high for a second straight day. Japan's Nikkei average .N225 rose 0.8 percent.

Notable gainers include the technology-heavy Taiwanese stocks, with Taiwan's main index .TWII nearing the 27-year high of 11,270 hit on January 23. The index has rallied 4.25 percent since last Wednesday, boosted by the rally in tech stocks and the Nasdaq.

The euro EUR= held near a two-week high while Germany's benchmark 10-year bond DE10YT=TWEB hit its own two-week high of 0.486 percent growing conviction the European Central Bank would announce as early as next week its intention to end a drawn-out stimulus programme by year-end.

ECB Chief Economist Peter Praet said on Wednesday that robust growth made the central bank increasingly confident that inflation is on its way back to target, raising the chances it may use next week’s meeting next week to reveal more about the end of its bond-buying program.

Praet's comments sent the euro to $1.1796 EUR=, its highest level since May 22, on Wednesday. The common currency last traded up 0.1 percent at $1.1789. The dollar index .DXY was down 0.1 percent to 93.525.

Higher yields helped to lift S&P 500 financials .SPSY, which rose 1.8 percent and were the biggest percentage gainer among S&P 500 sectors.

Stocks Struggle Amid Risk-Off Mood; Dollar Climbs

Global Stock Markets

There was a risk-off flavor to markets on Tuesday, with U.S. stock futures slipping, European equities struggling for traction and declines across Asia as investors grappled with worries around trade, growth and geopolitics. The dollar rallied, a bond sell-off deepened, and oil advanced.

 

The Stoxx Europe 600 Index edged higher led by energy shares, gradually overcoming a plunge in telecom companies. Equity benchmarks fell in South Korea and Australia earlier, while they rose in Shanghai and dropped in Hong Kong after data showed China’s economic momentum holding up but investment slowing. Treasury yields once again climbed above 3 percent. The euro slid after German growth data disappointed.

What began as a sell-off in European bonds on Monday -- off the back of hawkish comments from an ECB official -- picked up steam through the U.S. session and carried through to Asia. Rising yields, a stronger dollar and sliding stocks are fast becoming a familiar and uncomfortable cocktail for investors. Now violence in the Middle East, the U.S.-China trade spat, uncertainty on Italy’s government and global growth concerns are helping cement the prevailing sentiment.

Despite the sour mood, established safe-haven assets failed to catch a bid. Gold and the yen slipped, while the Swiss franc edged lower.

Elsewhere, the Turkish lira hit a new low after President Recep Tayyip Erdogan said he intends to tighten his grip on the economy and take more responsibility for monetary policy if he wins an election next month. Emerging-market stocks slumped.
tocks
The Stoxx Europe 600 Index increased 0.1 percent as of 7:30 a.m. New York time.
Futures on the S&P 500 Index fell 0.3 percent, the first retreat in almost two weeks.
The MSCI All-Country World Index dipped 0.4 percent, the first retreat in a week and the largest decrease in more than a week.
The U.K.’s FTSE 100 Index gained 0.2 percent to the highest in 16 weeks.
Germany’s DAX Index climbed less than 0.05 percent.
The MSCI Emerging Market Index sank 1.3 percent, the first retreat in more than a week and the biggest tumble in more than three weeks.
The MSCI Asia Pacific Index sank 0.9 percent, the largest decrease in more than three weeks.

Currencies
The Bloomberg Dollar Spot Index jumped 0.4 percent, the biggest increase in two weeks.
The euro fell 0.4 percent to $1.1884, the largest fall in a week.
The British pound declined 0.2 percent to $1.3524, the biggest drop in more than a week.
The Japanese yen dipped 0.3 percent to 109.94 per dollar, the weakest in more than 14 weeks.

Bonds
The yield on 10-year Treasuries climbed two basis points to 3.02 percent, the highest in almost three weeks.
Germany’s 10-year yield increased two basis points to 0.63 percent, the highest in almost three weeks.
Britain’s 10-year yield gained two basis points to 1.492 percent, the highest in almost three weeks.

Euro remains stuck at four-month lows; U.S. bond yield rise supports dollar

European Stock Markets

The euro remained stuck near four-month lows on Tuesday after weaker-than-expected economic growth in Germany and a rise in U.S. Treasury yields helped the dollar recover following a pause in its rally.
 

The dollar’s strength also helped it gain to within a whisker of hitting a 3-1/2 month high versus the Japanese yen while major currencies elsewhere traded within tight ranges ahead of U.S. retail sales.

The greenback’s rally, which has seen the dollar claw back most of its 2018 losses after a reassessment of the path of U.S. monetary policy versus other countries, came to a halt last week following disappointing U.S. inflation numbers.

Euro bulls were also given a boost on Monday after European Central Bank policymaker Francois Villeroy de Galhau said that the ECB could give fresh guidance on the timing of its first rate hike as the end of its exceptional bond purchases approaches.

German economic growth slowed slightly more than expected in the first quarter of the year due to weak trade but analysts called it a blip and predicted Europe’s biggest economy would shift into a higher gear again.

A survey showed that the mood among German investors remained unchanged at its lowest level in five and a half years in May, reflecting persisting concerns that Europe’s biggest economy could be hit be a trade dispute with the United States.

The euro slipped 0.1 percent to $1.1919, but remained below Monday’s high of $1.1996, which was the common currency’s highest level since May 3.

The dollar’s index rose 0.2 percent to 92.764, pulling up from 92.243 on Monday, which was its lowest level since May 2.

The benchmark 10-year U.S. Treasury yield increased two basis points to about 3.019 percent, after rising two basis points on Monday, helping support the greenback.

The benchmark yield was supported by signs of an easing in trade tensions between the United States and China after U.S. President Donald Trump pledged to help Chinese telecoms firm ZTE Corp, which has been penalised for violating U.S. sanctions with Iran.

The Norwegian crown rose 0.3 percent versus the euro to 9.56 crowns after strong quarterly economic data raised expectations of a rate rise later this year. It later gave up most of those gains.

The ailing Turkish lira fell to a fresh record low of 4.3990 against the dollar, bringing its losses this year to more than 13 percent after President Tayyip Erdogan said he plans to take greater control of the economy.

Argentina’s peso plunged to a new record low despite hefty central bank interventions in the past few days and policy makers jacking rates higher in an attempt to stop the peso’s slide.

Euro climbs with ECB rate-hike debate - sterling jumps

European Stock Markets

The euro rose on Monday that European Central Bank officials were shifting their debate from bond purchases to the expected path of interest rates, reviving bets that the ECB may raise rates sooner than previously thought. 

Sterling pushed to its highest against the euro in more than five weeks and against the dollar in more than a month, as Britain and the European Union appeared to reach a broad agreement on a post-Brexit transition period and the Irish border.

The debate among ECB policymakers is increasingly about the steepness of the rate path, as some want future expectations contained given the slow rebound in inflation, five sources with direct knowledge of the discussion.

In late-afternoon U.S. trading, the euro zone single currency was last up 0.46 percent, at $1.2344. 

But the euro weakened against the pound on relief over the latest development in talks between Britain and the European Union on a Brexit agreement, which raised optimism about a smoother departure for Britain from the trading bloc. 

Sterling was last up 0.18 percent, at 87.95 pence per euro. It was up 0.67 percent, at $1.4035, against the dollar. 

The strength in euro and sterling put downward pressure on the dollar as traders speculated whether the Federal Reserve may signal a faster pace of rate increases in the coming months as the labour market tightens further. 

The Federal Open Market Committee, the U.S. central bank’s policy-setting group, will meet on Tuesday and Wednesday. Rates futures imply traders have fully priced in a rate increase which would raise the target range to between 1.50 percent and 1.75 percent. 

A sharp sell-off in Wall Street stocks likely added more pressure on the dollar.

The dollar index, which tracks the greenback versus a basket of six other major currencies, fell 0.45 percent to 89.826. 

The futures market showed speculators bet on the dollar deteriorating further. 

Their net short positions against the greenback grew to a five-month high last week, according to Commitments of Traders data released on Friday.

ECB eyes at baby step towards stimulus exit

European Stock Markets

The European Central Bank is all but certain to keep policy unchanged on Thursday but may tweak its communication stance to offer at least a few clues about its progress towards ending its unprecedented bond purchases later this year. 

Having revived euro zone growth with lavish stimulus, the ECB is now debating whether to step back and preserve its remaining firepower. But concerns over low inflation, a strong euro, rising political risk and recent market volatility are expected to prevail for now.

Having promised to review their communication stance in “early” 2018, however, and with asset purchases due to expire in September, policymakers are likely to give investors at least a few hints to prepare them for a broader revision of policy around the summer months, economists predicted.

The ECB announces its policy decision at 1245 GMT, followed by ECB President Mario Draghi’s news conference at 1330 GMT, which will also include a quarterly update of economic projections.

The dichotomy facing the ECB is that while growth has blown past expectations, inflation remains weak, having hit a 14-month low in February and staying well short of its target of almost 2 percent.

While the bloc’s five-year growth run and a rapid drop in unemployment suggest that inflation will eventually rise, its rebound is still months away, complicated by the euro’s rise against the dollar, which puts a lid on price growth.

The single currency was trading at $1.24 on Thursday, a touch below a three-year high hit last month.

Risks of a trade war with the United States, an inconclusive election in Italy and falling bank share prices could add to caution, economists predicted.

New economic projections are also not likely to trigger a bigger policy shift since they are expected to confirm earlier expectations, pointing to an eventual rise in inflation but still indicating a lack of convincing underlying price pressures.

The biggest change on the agenda is likely to be a proposal to drop the bank’s so-called easing bias, which stipulates that bond buys could be increased if needed.

While few if any actually expect purchase volumes to rise, such a tweak would suggest policymakers are increasingly confident that their 2.55 trillion bond buys could finally end this year after several extensions. 

For now, the ECB’s benchmark deposit rate will stay at minus 0.4 percent and monthly bond buys will continue at 30 billion euros per month.

Global Stocks notched up; Dollar dips

Global Stock Markets

Global stocks notched further gains on Monday and the dollar stayed on the back foot, as investors bet the new head of the U.S. Federal Reserve will steer a steady course on policy when he addresses lawmakers this week.

MSCI’s index of world stocks was up 0.4 percent, with the pan-European Stoxx 600 up 0.7 percent.

Asian markets also rose, with Chinese stocks up 1.2 percent after the ruling Communist Party set the stage for President Xi Jinping to stay in office indefinitely. 

Much of the market’s focus during the coming week will be on monetary policy, with the heads of the European Central Bank and Bank of England set to give speeches. But they are likely to be overshadowed by Fed chair Jerome Powell. 

U.S. stock markets calmed on Friday after the Fed said it saw steady economic growth continuing and no serious risks on the horizon. 

Investors also seem to be wagering that Powell will stick to that script at his first appearance before the House on Tuesday, followed by testimony to the Senate on Thursday. 

The expected lack of policy surprises from Powell saw yields on U.S. 10-year Treasuries back off to 2.86 percent and away from a four-year top of 2.957 percent, dragging down the dollar. 

The currency surrendered early gains to dip 0.3 percent against a basket of currencies to 89.66. That followed a 0.8 percent bounce last week. 

Sterling was up 0.5 percent on Monday after Bank of England deputy governor Dave Ramsden said the bank might need to raise interest rates somewhat sooner than he had expected if wage growth picked up early this year. 

The pound also benefited from hopes that Britain’s exit from the European Union might be less disruptive than feared, with opposition leader Jeremy Corbyn set to give a speech on Monday backing a new customs union with the bloc. 

The euro was 0.3 percent firmer on the back of dollar weakness, though investors largely held back from taking big positions ahead of a national election in Italy and the conclusion of coalition talks in Germany. 

ECB President Mario Draghi is also set to appear before the European Parliament later in the day, while BoE governor Mark Carney speaks in Edinburgh on Friday. 

In commodities, oil prices steadied after hitting their highest level in nearly three weeks, supported by comments from top exporter Saudi Arabia that it would continue to curb shipments in line with the OPEC-led effort to cut global supplies.

ECB meets as euro hits three-year high

European Stock Markets

The euro steadied at a three-year high on Thursday and shares inched back as traders waited to see if the European Central Bank would try to cool the currency’s hottest run in nearly four years. 

Concerns about U.S. protectionism kept the dollar weak after its worst day in six months, but it was the ECB’s first meeting of 2018, and when it will end its 2.6 trillion euro stimulus programme, that was attracting attention.

Another challenge facing policymakers is how to address the euro’s surge - it hit a three-year high of over $1.24 on Thursday - as this could dampen inflation and endanger the work done by years of unprecedented stimulus.

Euro zone bonds were again reducing the premium offered by former debt crisis countries like Greece, Portugal and Spain compared with ultra-safe German debt, but it will be a delicate balancing act for ECB chief Mario Draghi. [GVD/EUR]

Oil prices, which are a major driver of inflation, hit $71 per barrel in Asian trading for the first time since 2014. [O/R]

The uncertainty about the ECB made for a quiet start for European shares. The pan-European STOXX 600 barely budged as Germany's exporter-heavy DAX .GDAXI index fell 0.2 percent to offset small gains on London's FTSE .FTSE and France's CAC 40 .FCHI. [.EU]

Trading updates saw drinks giant Diageo (DGE.L) warn its sales were being crimped by the resurgent pound. Sterling hit its highest in six months against the euro on Thursday, having also bounded back to its pre-Brexit vote levels against the dollar this week. [GBP=D4]

In the tech sector, Software AG (SOWGn.DE) fell 3.7 percent as it reported a drop in core profits, while Nordic bank Nordea’s results (NDA.ST) also proved a drag. [.EU]

Asian trading had been a mixed bag, with many of the moves driven by the weakening of the dollar.
MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS touched an all-time peak for the ninth session in a row, but Japan's Nikkei .N225 fell 1.1 percent, hit by the yen's latest jump against the greenback.

MSCI ACWI .MIWD00000PUS, the index provider’s broadest gauge of the world’s stock markets, consolidated its more than 6.5 percent gains for the month

A new Reuters poll of over 500 economists showed the global economy is expected to grow at the fastest pace since 2010.

The upbeat mood, however, has come up against renewed fears of protectionism by the United States after President Donald Trump’s decision to impose steep import tariffs on washing machines and solar panels earlier in the week.

U.S. Commerce Secretary Wilbur Ross, hinted at other measures against China too on Wednesday, saying at the annual Davos meeting that Washington was investigating whether there was a case for taking action over China’s infringements of intellectual property.

Trump is scheduled to speak in Davos on Thursday.

Analysts say they cannot remember any U.S. Treasury Secretary openly embracing a cheaper dollar, at least in the last two decades or so.

The dollar’s index against a basket of six major currencies .DXY =USD tumbled to a three-year low of 88.816 before steadying in European trading. It has fallen 1.9 percent so far this week.

The dollar had also slipped to as far as 108.74 yen JPY=, its lowest since mid-September, and to its weakest against the Chinese yuan since November 2015. CNY=CFXS It is on course for its biggest ever monthly fall against the yuan.

Euro hits three-year high as Europe leads global optimism

The euro hit a fresh three-year high on Monday as optimism around growth buoys expectations of tighter policy from central banks, while the chance of a pro-European coalition in Germany also boosted confidence in the continent

With the world in general and Europe in particular showing signs of sustained economic growth, global stocks benchmarks jumped to fresh highs, even though investors are now pricing in the withdrawal of central banks’ extraordinary stimulus.

That view was given further fuel last week by an account of European Central Bank discussions which suggested policymakers could soon start preparing the ground for a reduction in support.

The single currency rose to $1.2227 at one stage on Monday, a price last seen in December 2014, just before the ECB first announced its massive government bond purchase program.

Nor is the ECB the only game in town: Bank of Japan Governor Haruhiko Kuroda offered a positive view on his nation’s economy and inflation on Monday, sending the yen to a four-month high against the dollar.

Euro jumps to 3-year high on German coalition breakthrough

European Stock Markets

The euro climbed to a three-year high on Friday after German Chancellor Angela Merkel's conservatives and rival Social Democrats reached a breakthrough in coalition talks.

The news gave fresh legs to the current rally being driven by expectations that the European Central Bank (ECB) may quicken the pace of trimming its massive monetary stimulus.

In early London trading on Friday, the euro rallied 0.7 per cent against the US dollar to hit its highest levels since January 2015 at US$1.2120.

On a two-day cumulative basis, the single currency has jumped 1.4 per cent, its best performance since August last year.

On Thursday, minutes of the ECB's December meeting showed policymakers could revisit their communication stance in early 2018, boosting expectations that they are preparing to reduce their vast monetary stimulus programme.

Euro heads higher as ECB heads for the exit

The euro climbed for a third day and stocks slipped to a month low on Thursday, as traders waited for formal confirmation from the European Central Bank that will take its biggest step yet in unwinding years of loose monetary policy.

Banking stocks were also in focus as Europe’s Deutsche Bank <DBKGn.DE > and Barclays (BARC.L) both tumbled after results, and South Africa’s markets lurched lower again after its budget on Wednesday had rattled investors. 

In a pre-ECB appetiser, Sweden and Norway’s central banks both kept their interest rates on hold. Their currencies barely budged though as attention remained firmly on a euro camped at a 1-week high of $1.1820 and up 12.5 percent for the year. [/FRX] 

The ECB will announce its policy decision at 1145 GMT and hold a news conference at 1230 GMT.

It is expected to say that from the start of next year it will be pumping either 30 or 40 billion euros a month into euro zone bond markets, rather than the current rate of 60 billion a month. 

Markets will also be looking at how long it plans to maintain that new rate and for any tweak in language on when it may start actually raising its currently negative interest rates.

“The pace they decrease the bond buying is the important factor, I would say they cut (the purchases) by 20 billion (a month) considering how the market is,” said SEB investment management’s global head of asset allocation, Hans Peterson. 

European bonds, which like other global fixed income markets have seen a selloff over the last week, remained subdued. 

Benchmark German Bund yields DE10YT=TWEB hovered at just over 0.47 percent after U.S. Treasury yields US10YT=RR had hit a seven-month high of 2.4750 percent overnight. [GVD/EUR]

European shares struck 4-week lows too before they managed to steady. 

While bank stocks .SX7P were the main drag, former mobile phone giant Nokia (NOKIA.HE) was the biggest individual faller as weak earning from its now mainstay networks equipment business sent its shares down as much as 14 percent. [.EU]

Earnings and commodities keep stocks bulls happy

World stocks stayed near record highs on Tuesday, as a flurry of U.S. earnings and a rally in commodity markets helped underpin one of the most durable bull runs of recent history. 

Stronger profits from investment bank Morgan Stanley and healthcare majors Johnson & Johnson and UnitedHealth looked set to keep Wall Street’s rally intact when it reopens [.N] after largely flat morning on Europe’s big bourses. 

The dollar .DXY meanwhile was enjoying its longest winning streak since February, posting a fourth day of gains supported by broad-based weakness for the euro and the pound. [/FRX] 

It had been lifted overnight, along with interest rate-sensitive 2-year Treasury yields, by reports that U.S. President Donald Trump might pick Stanford University economist John Taylor to lead the Federal Reserve after Janet Yellen’s term ends next year. 

Taylor is an advocate of a rules-based approach to interest rate policy that would likely see official Fed rates much higher than at present - at least 3.5 percent according to some economists. 

The pop in short-yields was not matched at the long end though and the 2-to-10 year U.S. yield curve hit its shallowest in more than a year before markets began to price in a bit more caution in European trading.

German Bunds and UK gilts had initially followed U.S. yields higher. British and euro zone inflation figures both came in strong to bolster bets on the first UK rate rise in over a decade and stimulus withdrawal from the ECB.

The moves then unraveled amid central banker chatter GBP= that was seen as being more mixed than of late. 

The euro EUR=EBS dropped to $1.1754 while sterling GBP=D3 fell half a percent on the day to as low as $1.3192 as 10-year gilt yields dropped to a 3-week low. [GVD/EUR] [FRX/] 

Silvana Tenreyro, a new member of the Bank of England’s monetary policy committee, said upward pressure on UK inflation from sterling’s weakness would start to wane in the coming months.

Earlier on Tuesday, data showed Britain’s inflation rate hit 3 percent, above the BoE’s 2 percent target but in line with expectations.

ECB EDGY ON EURO STRENGTH

The euro has gained ground - up almost 12 percent against the dollar - this year on solid economic momentum in the currency bloc and on expectations the European Central Bank will scale back its massive stimulus starting next year.

The minutes of the ECB’s September policy meeting released on Thursday showed policymakers debated the trade-off between various options for extending its asset buying and a reduction. 

But policymakers also expressed concern and mentioned the potentially negative aspects of a strong euro and its impact on inflation at the meeting. 

The single currency is now forecast to stay around the $1.18 it was last trading on Thursday in a month, and over the next 3-6 months. It is then expected to add about 2 percent to $1.20 in a year. 

If those predictions for end 2017 are realized, it will mark the first year of gains for the euro since 2013. 

While expectations are for currency markets to trade in ranges, forecasts were more in favor of the euro in a year’s time, with higher highs and higher lows.

Euro Zone

The cost of one Euro is now almost US$1.20. The single currency has not been at $1.20 since January, 2015 or a long time ago.

Yesterday, we wrote about the other side of this coin: so what is happening in the United States. To be able to see the whole picture, we need to look at what is happening on in Europe.

Most investors are now looking at Europe and are determining that things don’t look that bad particularly when compared to the United States.

In a quick snapshot we see that all the countries in the European Union are growing and the unemployment rates are coming down.

Mario Draghi, President of the European Central Bank, has hinted that the quantitative easing operations at the ECB are nearing their end. We believe, as do many investors that Mr. Draghi would even give some hints out about the future of the ECB’s monetary policy at the recent central bank leaders meeting at Jackson Hole, Wyoming.

The next crucial date in this saga will come in September when the next meeting of the ECB takes place. It is expected that at that meeting that Mr. Draghi and the ECB will announce that the quantitative easing is done and that interest rates will be moving up soon.

So in the near future the ECB monetary policy will be moving in the same direction as the Federal Reserve in the US rather than producing policies that are going in opposite directions. In other words, monetary policy in the European Union will be tighter than the monetary policy in the US, than it has been for several years and this will make for a stronger Euro against the US dollar rate.

But, not everything impacting the foreign currency markets these days is economic in nature.  We see that politics is playing a big role in what is happening in the financial markets specifically the foreign exchange markets.

By far the most important political contributor to the strengthening of the Euro is what is happening in Germany (Europe’s largest economy).

Polls are projecting an Angela Merkel triumph in the September elections, which will give Ms. Merkel a fourth term as Chancellor. This is important in providing continuity on the European continent but also seems to provide the rest of Europe with greater and stronger leadership.

Here’s what financial markets are looking for from the ECB

3. STAFF FORECASTS

Revisions to the ECB’s staff projections following recent gains in the euro is another important focus.

Markets expect a slight downward revision in core inflation forecasts, although analysts said the ECB’s long-term forecasts may be little changed and should not in themselves derail plans for tapering next year. 

Inflation in the 19-country currency bloc, which the ECB aims to keep just below 2 percent, accelerated to 1.5 percent in August from 1.3 percent. 

The ECB forecasts inflation of 1.5 percent in 2017 and 1.3 percent in 2018. 

4. TAPERING

Markets have pushed back expectations for when the ECB will signal a scaling back of its stimulus, to October from September. The latest Reuters poll predicts the same. 

Still, ECB comments will be scrutinized for any clues on the timing and scale of a taper.

About 36 percent of government bond yields in the euro zone are below zero, compared with a peak in June 2016 of 51 percent, according to JP Morgan Asset Management. Globally, 30 percent of government bond yields are sub zero. 

Frederik Ducrozet, an economist at Pictet Wealth Management, expects the ECB to lay the groundwork for the decision to be made by year-end, tasking its committees to study all policy options for 2018. 

5. BOND-BUYING PARAMETERS

The ECB may also be questioned about a growing scarcity of eligible bonds for the bond-buying scheme, which might encourage it to wind down stimulus sooner rather than later. 

The ECB bought fewer German bonds in August than in any month since the start of the stimulus programme, suggesting it was holding back to avoid running out of debt to buy. 

As the ECB pushes against its self-imposed limits for asset purchases, bond investors will be looking for any changes in the composition of the bond-buying scheme -- whether that’s in country allocation or changes in the mix of corporate and government bonds in the scheme. 

6. MARKET IMPLICATIONS

The market reaction itself could be in the spotlight, especially if the euro moves sharply either way.

European stocks peaked at a two-year high in May, and the pan-European STOXX 600 equity index has fallen by around 6 percent since then, with euro zone stocks .STOXXE shedding a similar amount. Some investors blamed the euro’s blistering ascent as the main culprit. 

European banking stocks .SX7P will benefit from any hawkish slant, as a low-rate environment has hurt margins. Banks have so far underperformed the broader market and are relatively cheap. 

If the ECB maintains the status quo, European stocks may rise, as companies in the pan-European equity index get more than half their revenues outside the euro zone, according to estimates from Societe Generale.

Euro minefield - what markets will monitor at Thursday's ECB meeting

European Central Bank policymakers hold a widely anticipated meeting on Thursday, amid speculation the central bank wants to wind down its extraordinary bond-buying monetary stimulus soon. 

However, this year’s surge in the euro exchange rate complicates the ECB’s exit strategy. It curtails already sub-target inflation by making dollar-priced imports cheaper, dragging down the booming export sector and cutting into corporate earnings from outside the bloc. 

Any mention of the euro and its relative impact on financial and economic conditions, as a result, may be the biggest market mover on Thursday. 

Here’s what financial markets are looking for from the ECB’s statement and President Mario Draghi’s press conference. 

1. EURO STRENGTH 

The euro’s more than 13 percent rise against the dollar so far this year, its biggest in 14 years, puts the currency at the top of investor watch lists. 

Absolute levels for the euro are still below its levels since ECB chief Mario Draghi promised to save the euro zone, but it is the speed of the move that is a concern. 

On a trade-weighted basis, the euro EUR=ECBF has gained nearly 6 percent in less than five months. That strength creates obstacles for both economic growth and inflation in the euro zone. 

Sources told Reuters last week that euro strength could delay ECB plans to roll back stimulus, and Draghi is sure to be asked about the currency in the post-meeting news conference.

2. POLICY STATEMENT

With currency strength making a rare appearance in the minutes of the last policy meeting on July 20, markets will watch if the currency gets more attention in the formal post-meeting statement this week. 

Despite the reference, Morgan Stanley analysts say mention of the currency has dropped sharply in recent months after data-mining each policy statement and accompanying press conference since 1998. 

July’s policy statement had an abnormally low nine mentions of the currency compared with an average of 27 in the last two years and far below 56 times at its March meeting.