Stocks climb, euro inches higher in big week for markets

By Saikat Chatterjee

LONDON (Reuters) – World equity markets got off to a solid start on Monday and the euro pulled away from parity as market participants scaled back bets on the Federal Reserve interest rate hike next week and on optimism spurred by central bank pledges to support China’s economy.

U.S. stock futures were up more than 1% while European stock indices were a sea of green in a big week for the region. [.EU]

The European Central Bank is set to raise rates for the first time in more than a decade on Thursday, the same day the bloc will be hoping Russia resumes gas supplies. Italy, meanwhile, is again in the grip of a political crisis.

The pan-European STOXX 600 index was up 1.3% by 1030 GMT after posting a 0.8% drop last week. Gains on Monday were broad-based and led by miners, energy stocks and banks.

“It is a wild week this week, there is so much going on,” said James Rossiter, senior global strategist at TD Securities.

“The ECB is a huge focus, there is not a lot of scope for the ECB to surprise, 25 bps is locked in I think… and then there is Italy and Nord Stream too.”

Italy’s borrowing costs surged on Monday and the premium investors demand for holding Italian debt over safer German paper was at its widest in a month as political turmoil in Europe’s fourth largest economy rumbled on.

Prime Minister Mario Draghi attempted to resign from his post on Thursday after the 5-Star Movement, a coalition partner, failed to back him in a confidence vote. Draghi’s resignation was rejected by the Italian president.

Draghi is expected to address parliament on Wednesday but Italy’s 10-year bond yield rose 10 basis points (bps) on Monday to as high as 3.48%, pushing the closely watched spread over German Bund yields to its widest level in over a month at around 235 bps.

“We expect volatility to remain high until then in response to various rumours concerning whether he will remain firm on his resignation or whether he is willing to remain in place,” UniCredit analysts said in a note.

“Any indication that could increase the likelihood of early elections will ultimately be negative for BTPs and drive the spread wider.”

Overnight, a gauge of Asian shares rose more than 1%, its biggest daily rise in nearly two months, boosted by a jump in Chinese shares as regulators encouraged lenders to extend loans to qualified real estate projects.

It came too as the high-flying dollar, which has had its strongest start to a year in recent memory, eased on Monday. [/FRX]

The uncertainty will haunt the ECB at a policy meeting where it is likely to kick off a tightening cycle with a rise of 25 bps, with markets hanging on details of an anti-fragmentation tool intended to ease pressure on borrowing costs for the Union’s most indebted members.

Friday’s rally on Wall Street reverberated through global markets with MSCI’s broadest index of Asia-Pacific shares outside Japan up 1.4%, having shed 3.5% last week.

A wider index of global stocks was up 0.4%.

Chinese blue chips added 1.0% as the head of the country’s central bank pledged to help the economy, though Shanghai had also announced more districtwide coronavirus testing.

Traders are back to expecting a 75 basis point interest rate hike from the Federal Reserve next week, after flirting with the prospect of a 100 basis point move to rein in inflation.

“We do not believe that central banks will be able to raise rates to the extent that they or the market forecasts given the headwinds to already moderating economic growth,” said Steve Ellis, global CIO of fixed income at Fidelity International.

Corporate earnings will be in sharp focus this week with Goldman Sachs Group Inc, Bank of America Corp, International Business Corp, Netflix Inc, Tesla Inc.O and Twitter Inc due to report.

Of the 35 companies in the S&P 500 that have reported, 80% have beaten analyst expectations, according to Refinitiv. Analysts now expect aggregate year-on-year second-quarter profit growth of 5.6%, down from 6.8% at the beginning of the quarter.

Rising interest rates and a firm dollar have been a major drag for non-yielding gold which was stuck at $1,713 an ounce after shedding 2% last week. [GOL/]

Oil prices rose in the risk-on wave. President Joe Biden continued his trip to the Middle East hoping to get agreement on an increase in output, having seemingly come away from Saudi Arabia empty handed. [O/R]

After an early dip, Brent crude added $2.54, or 2.5%, to $103.70 a barrel, after a 2.1% gain on Friday.

(Additional reporting by Marc Jones in London; editing by Kirsten Donovan and Bernadette Baum)