Bonds rally as ECB official signals rate reprieve: Markets wrap

A rally in European bonds gained steam Tuesday after a key European Central Bank official raised hopes that the end of the rate-hiking cycle is in view.

Yields tumbled across the region, with those on Italian debt sinking 12 basis points after ECB Governing Council member Klaas Knot said monetary tightening beyond next week’s meeting is anything but guaranteed. The yield on 10-year German securities fell as much as 8 basis points to 2.4%, a two-week low.

Equities also staged a recovery from the steepest losses in more than a week Monday, with media and leisure companies pacing a modest gain in the Stoxx Europe 600. Ocado Group shares rose as much as 16% after the UK online grocer’s first-half earnings topped estimates.

A reprieve in inflation is prompting dovish talk among central bankers and speculation they’re ready to back down from the fastest pace of hikes in four decades. ECB Governing Council member Ignazio Visco said inflation may come down more quickly as lower commodity prices start to trickle through the economy. Consumer price index reports are due out of the Eurozone and UK Wednesday, after data last week showed US price pressures cooled more than economists had forecast.

Meanwhile, US futures steadied ahead of bank earnings. Morgan Stanley and Bank of America Corp. may temper early optimism with more downbeat results due before US trading opens, according to Bloomberg Intelligence.

Further afield, China’s stuttering recovery is leading to disquiet as investors consider the knock-on effects from a slowdown in the world’s growth engine.

“Investors will be much more interested to understand the outlooks for Q3, as macro continues to deteriorate, mainly in Europe, and China’s expectation of a sudden recovery is faltering,” Luca Fina, head of equity at Generali Insurance Asset Management, wrote in a note to clients.

On the macro front, US retail sales due later on Tuesday will offer the latest read on the health of the consumer. The median economist forecast indicates spending will remain robust.

Treasury Secretary Janet Yellen said the nation is on a “good path” to bringing down inflation without a major weakening in the jobs picture.

Bets on longer-term bonds risk may start to become more popular as the Fed nears the endpoint for the cycle, BMO Capital Markets strategist Ian Lyngen wrote in a note.

Stocks in Asia retreated as China’s sluggish economic recovery triggered growth forecast cuts, with shares in Hong Kong the worst performers in the region.

Key events this week:

• US retail sales, industrial production, business inventories, cross-border investment, Tuesday
• Eurozone, UK CPI, Wednesday
• US housing starts, Wednesday
• China loan prime rates, Thursday
• US initial jobless claims, existing home sales, Conf. Board leading index, Thursday
• Japan CPI, Friday

Some of the main moves in markets:

Stocks

• The Stoxx Europe 600 rose 0.2% as of 9:46 a.m. London time
• S&P 500 futures were little changed
• Nasdaq 100 futures were little changed
• Futures on the Dow Jones Industrial Average were little changed
• The MSCI Asia Pacific Index fell 0.1%
• The MSCI Emerging Markets Index fell 0.5%

Currencies

• The Bloomberg Dollar Spot Index was little changed
• The euro was little changed at $1.1238
• The Japanese yen rose 0.3% to 138.31 per dollar
• The offshore yuan was little changed at 7.1775 per dollar
• The British pound was little changed at $1.3084

Cryptocurrencies

• Bitcoin rose 0.4% to $30,045.52
• Ether rose 0.7% to $1 902.76

Bonds

• The yield on 10-year Treasuries declined five basis points to 3.76%
• Germany’s 10-year yield declined six basis points to 2.42%
• Britain’s 10-year yield declined seven basis points to 4.37%

Commodities

• Brent crude rose 0.2% to $78.66 a barrel
• Spot gold rose 0.4% to $1 962.15 an ounce