European stocks drop ahead of ECB policy meeting
European equities fell Thursday ahead of a meeting of the bloc’s central bank, where she is expected to outline her plans for monetary policy tightening to curb persistently high inflation.
The regional Stoxx 600 index lost 0.9 percent in early trades, while stock markets in the UK, Germany and France all fell lower. Futures trading also implied a muted opening on Wall Street later in the day, with contracts tracking the blue-chip S&P 500 stock index largely flat.
After a meeting on Thursday, the European Central Bank is expected to outline plans to end its eight-year policy of negative interest rates after months of record high inflation.
Meanwhile, U.S. data from Friday is also expected to show the annual pace of consumer price increases in the world’s largest economy at more than 8 percent in May, confirming the Federal Reserve’s determination to lift borrowing costs. .
“It’s quite a shift [in Europe] after years of low inflation,” said Juliette Cohen, strategist at CPR Asset Management. “We are now in a different world where the deflationary forces we have seen for years are no longer in place and we are in a new era where inflation will be higher for longer.”
Consumer prices have risen globally since the reopening of industries due to the coronavirus shutdown and sanctions and supply chain disruptions following Russia’s invasion of Ukraine, pushing up energy and food costs.
US and European treasuries have sold off sharply in anticipation of further inflation and interest rate hikes, while the FTSE All World index of global equities has lost nearly 14 percent so far this year.
The ECB, which has kept its key deposit rate at minus 0.5 percent to boost lending and spending during the pandemic era, is expected to signal plans to bring borrowing costs back above zero in September.
The asset purchase program is expected to end in July. ECB policymakers are also said to have discussed new mechanisms to protect weaker countries in the currency bloc, such as Italy, from higher debt levels.
“We expect [the ECB] to raise interest rates in July and in the next four meetings,” said Hetal Mehta, senior European economist at Legal & General Investment Management.
“They are also likely to intervene verbally to offer some comfort to the markets,” about preventing a “disproportionate increase in borrowing costs for a country, although it is questionable whether they have a credible program to do so.”
In Asia, a broad FTSE index of equities outside Japan fell 0.6 percent, while the Nikkei 225 in Tokyo was trading flat.
The yen hit a new 20-year low against the dollar of 134.55 before returning to 133.6.
Traders bet against the Japanese currency after Governor Haruhiko Kuroda . from the Bank of Japan sworn to bolster the economy with “strong” monetary stimulus and, in claims he later retracted, said consumers were “tolerant” of rising prices.
Government bond markets traded steadily, following price declines in the previous session. Ten-year US Treasury yields, which are inversely proportional to the price of the benchmark’s debt, have remained stable at just over 3 percent, reflecting the Fed’s money market bets that its key interest rate will rise above this level next year. bring.
The German 10-year Bund rate, which determines the cost of borrowing in the eurozone, was also stable at 1.34 percent, around the highest level since 2014.
The euro remained flat against the dollar, at just over $1.07. Brent oil, the oil benchmark, fell 0.4 percent to $123.2 a barrel, after soaring more than 50 percent so far this year.