Eurozone government bonds sell off after ECB signals early stimulus withdrawal

Eurozone government bonds and stocks sold off on Thursday after the bloc’s central bank said it would reduce its bond-buying scheme earlier than initially planned, damping expectations of continued support to safeguard safeguard from the fallout of the war in Ukraine.

The yield on Germany’s 10-year Bund, a barometer for eurozone borrowing costs, rose 0.07 percentage points to 0.26 per cent, reflecting a sharp fall in the price of the debt. The yield on Italy’s equivalent bond jumped 0.21 percentage points to 1.88 per cent.

While analysts had expected the European Central Bank to delay its plans to withdraw pandemic-era emergency policies in response to the effects of Russia’s invasion of Ukraine, “they’ve basically said they are going to keep moving along”, said David Zahn, head of European fixed income at Franklin Templeton.

The ECB, which has kept its main deposit rate at minus 0.5 per cent through the coronavirus era, “is going to be hiking rates by the end of the year, in my opinion”, Zahn said.

In equity markets, the regional Stoxx 600 index lost 1.7 per cent on Thursday after gaining 4.7 per cent in the previous session in a move that snapped four days of losses.

Germany’s Xetra Dax, which jumped almost 8 per cent on Wednesday, fell 3.2 per cent on Thursday and France’s Cac 40 dropped 3.2 per cent.

In its monetary policy statement, the ECB said it had “revised” its schedule for purchasing bonds issued by eurozone governments and would cut monthly purchases to €20bn by June, instead of October as previously planned. The war in Ukraine had convinced some analysts that the ECB, despite the inflationary effects of higher energy prices caused by sanctions against Russia, would hold back from any hawkish moves.

On Wall Street, the S&P 500 share index fell 1.2 per cent after rallying on Wednesday, remaining more than a tenth lower for the year to date. The tech-heavy Nasdaq Composite fell 1.6 per cent, with both indices reacting to expectations of US interest rate rises after inflation data confirmed analysts’ expectations for a 7.9 per cent annual rise in consumer prices in february

Surging inflation in the US, alongside record-high consumer price increases in the eurozone, have piled pressure on central banks to tighten monetary conditions after pursuing policies of ultra-low borrowing costs and massive bond-buying schemes since March 2020.

“The monetary punchbowl is being taken away and we won’t get the relief of more stimulus,” said Patrick Spencer, vice-chair of equities at RW Baird.

The euro, which has fallen steadily since Russian president Vladimir Putin launched the invasion of Ukraine, lost 0.6 per cent against the dollar to $1.10. The dollar index, which measures the greenback against a basket of six other currencies, added 0.3 per cent.

Elsewhere, Brent crude oil rose 4.7 per cent to $116 a barrel, having dropped 13 per cent on Wednesday as the United Arab Emirates moved to encourage fellow Opec members to increase production. Russia is the world’s second-largest crude oil producer and largest exporter of gas.

Futures tracking TTF, the European wholesale gas contract, fell by about 9 per cent to €135 per megawatt hour after rising as high as €335 on Monday.

In Asia, Japan’s Topix rose 4 per cent in its best day since June 2020, while Australia’s S&P/ASX 200 gained more than 1 per cent. China’s benchmark CSI 300 index advanced 1.6 per cent while in Hong Kong the Hang Seng index climbed 1.3 per cent.

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