Shares, euro jump on Ukrainian advance in northeast

By Samuel Indyk

LONDON (Reuters) -European shares jumped on Monday after Ukrainian forces advanced rapidly in Kharkiv province, in Russia’s worst setback since abandoning its Kyiv push in March, while the euro extended its European Central Bank-inspired gains from last week.

On Saturday, Moscow abandoned its main bastion in northeastern Ukraine, in a sudden collapse of one of the war’s principal frontlines after Ukrainian forces made a rapid advance.

The broad pan-European STOXX 600 index was up 1.1% in afternoon trading, hitting its highest since the end of August.

Germany’s DAX rose 1.7%, France’s CAC 40 and Britain’s FTSE 100 both jumped 1.3%.

U.S. stock futures signaled a higher open on Monday. S&P 500 and Nasdaq futures were higher by 0.6%, adding to Friday’s advance.

MSCI’s broadest index of Asia-Pacific shares outside Japan added 0.7%, having bounced modestly from a two-year low hit last week. Japan’s Nikkei added another 1.2%, after rallying 2% last week.

“The Russia-Ukraine situation is creating some glimmers of hope for the market that there might be a resolution and provide some relief on the intensity of the energy shock,” said Hani Redha, a multi-asset portfolio manager at PineBridge Investments.

Ukrainian advances and proposed emergency gas measures from the European Union, including a cut to EU-wide electricity use and a windfall profit levy on energy firms, weighed on European natural gas prices.

The front-month Dutch gas delivery contract, the benchmark for Europe, fell over 6%, dropping to its lowest level since Aug. 9 and is down almost 45% since the peak last month after Russia halted gas supplies through the Nord Stream 1 pipeline to Europe.

The euro welcomed Ukraine’s advances in the northeast of the country, extending its post-European Central Bank (ECB) gains last week to rise to its highest against the dollar in almost four weeks.

The single currency was also helped in part by a Reuters report that European Central Bank policymakers see a growing risk that they will have to raise their key interest rate to 2% or more to curb record-high inflation despite a likely recession.

The euro was last up 1.1% to $1.01545, after earlier touching its highest against a softening dollar since Aug. 17.

Meanwhile, German government bond yields slipped after rising earlier in the session, but are not far off their multi-year highs amid hawkish ECB commentary.

Germany’s 10-year yield was last down 5 basis points (bps) at 1.654%.

Italy’s 10-year government bond yield slipped back in line with European peers after earlier rising as much as 6.5 basis points to 4.098%, its highest since mid-June.

“There is an urgency to front load rate hikes and take rates to neutral as soon as possible,” said Mohit Kumar, interest rate strategist at Jefferies, in a note.

“Once we reach levels close to neutral, we do expect the doves to take back control at the ECB and hence see the recent shift as a front-loading exercise rather than a fundamental shift in ECB policy,” Kumar added.

The dollar index, which tracks the greenback against a basket of six major currencies, was down 0.7% to 108.04, after earlier dropping as low as 107.80 to its lowest since Aug. 26.

Still, the index is up almost 13% this year, having gained over 10% against the euro, 13% against the pound and 23% against the Japanese yen.

U.S. inflation data released on Tuesday will be key for determining the direction of travel in the near term.

Falling petrol prices are seen pulling down the headline consumer price index by 0.1%, according to a Reuters poll.

The core is forecast to rise 0.3%, though some analysts see a chance of a softer report.

“Commodities, in general, have been coming off and that’s likely to be the main driver of softer numbers,” PineBridge’s Redha said.

A soft number might revive speculation the Federal Reserve will only hike rates by 50 basis points this month, though it would likely have to be very weak to have a real impact given how stridently hawkish policymakers have been recently.

Oil prices have been trending lower amid concerns about a global economic slowdown, though cuts to supply prompted a 4% bounce on Friday which continued on Monday. [O/R]

Brent crude futures rose 77 cents, or 0.8%, to $93.61 a barrel, while U.S. crude increased 49 cents, or 0.6%, to $87.28.

The weaker dollar helped lift gold 0.6% to $1,727 an ounce, away from last week’s low of $1,690. [GOL/]

(Reporting by Samuel Indyk in London, additional reporting by Wayne Cole in Sydney; Editing by Bernadette Baum)