London — Investors buckled up on Thursday for the European Central Bank’s signal that it is ready to raise its interest rates for the first time in a decade, while the yen weakened to a new 20-year low on bets that the Bank of Japan will lag way behind.
There was little else worth focusing on. How fast the ECB will now lift the eurozone’s negative borrowing costs has dominated markets for months, coming as part of the most widespread tightening of global monetary policy in decades.
Bond dealers marked the moment by pushing Germany’s 10-year government bond yield — the main proxy for European borrowing rates — to its highest level in nearly eight years. Stocks slipped nearly 1%, while the euro barely budged.
With eurozone inflation at a record-high 8.1% and broadening quickly, the ECB has already flagged a series of moves, including ending its long-running asset buying programme at the end of this month. Details will be crucial, though.
“The bar has been set pretty high by the drum beat of recent comments [from top ECB policymakers)]” said Saxo Bank’s head of head of FX strategy John Hardy, referring to signals that rates will start rising next month, possibly even by half a percentage point.
“So it is about: do they clear that bar, and how does market react … I don’t think they will want to take anything off the table.”
Losses in European stocks were broad-based and led by miners, while the energy sector was the sole gainer, rising 0.4% as oil prices remained above $123 a barrel even as China imposed new Covid lockdown measures in Shanghai.
Asian stocks had fallen overnight and Wall Street futures were flat, though it was more to do with the renewed rise in both global bond yields and the dollar that will ultimately mean tighter financial conditions.
MSCI’s broadest index of Asia-Pacific shares outside Japan was down 0.65%, with Australian shares down 1.2% and Seoul’s Kospi 0.5% lower. Hong Kong’s Hang Seng turned around from small gains to fall 0.75% and Chinese A-shares fell 1%.
“It’s classic pre-central-bank-meeting price action,” said Matt Simpson, senior market analyst at City Index in Sydney, referring to the ECB announcement and news conference at 11.45am and 12.30pm GMT, respectively.
“It’s the most exciting meeting since [President Christine Lagarde] has been at the helm, since Draghi was here.”
The other major focus for global investors was on the sliding Japanese yen, which dropped to 134.56 against the dollar — a 20-year low — before regaining a little ground. It is also nearing crucial levels against China’s yuan which are highly sensitive for Asia.
The Japanese currency has been weighed down by a widening policy divergence, with the Bank of Japan remaining one of the few global central banks not signalling higher interest rates at present.
The global dollar index, which is up nearly 7% this year, was holding steady at 102.51, and the euro was flat at $1.0719 and testing 1.05 against the neighbouring Swiss franc.
The US 10-year yield ticked up on Thursday to 3.0344% from a US close of 3.029% on Wednesday and the two-year yield climbed to 2.7887% compared with a US close of 2.774%.
Adding to concern about European inflation, data showed the eurozone economy grew much faster in the first quarter than the previous three months, despite the war in Ukraine.
As investors guess at the size and pace of ECB tightening, they are also awaiting US consumer price data on Friday which the White House has said it expects to be “elevated”. Economists expect annual inflation to be 8.3%, according to a Reuters survey.