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It’s Draghi time.
The euro is holding steady and German government bonds are a touch weaker in the run-up to a European Central Bank rates decision and press conference that will likely reflect pressure on the ECB chief from his “high-class problem” of rising inflation.
Oil prices are picking up slightly after a savage sell-off, but energy stocks are under pressure and weighing on equity benchmarks.
After a period when politicians seemed to rule the market roost — the Trump presidency and French election concerns, for example — the central banks are back.
Monetary policy is in focus as the European Central Bank prepares to deliver its strategy decision on Thursday, and investors adjust to the prospect of a higher US interest rate environment.
The ECB is not expected to change interest rates from their record low levels, but president Mario Draghi potentially faces a difficult task in convincing the market that he can navigate a path between insuring the less healthy parts of the bloc’s economy continue to benefit from his largesse while also assuaging those concerned about signs of bubbling global inflationary pressures.
Investors reckon Mr Draghi will err on the dovish side, given he would not want to be seen laying the path for an imminent policy tightening ahead of potentially euro-destabilising elections in the Netherlands and France. (You can read Pimco’s thoughts on the matter here.)
As traders wait, the euro is holding steady at $1.0547, while German 2-year and 10-year debt yields are up one basis point to minus 0.84 per cent and 0.38 per cent respectively. (Yields rise when prices fall.)
In contrast, similar maturity US government bonds are adding 1bp to 1.37 per cent and gaining 2bp to 2.57 per cent. The former is the highest 2-year yield since August 2009, and reflects growing expectations that the Federal Reserve may have to quicken the pace of interest rate rises given evidence of an improving economy.
Data released on Wednesday showed 298,000 private US sector jobs were created in February, 100,000 above forecasts and a figure that suggests the official monthly labour market report on Friday will not only cement expectations for a 25 basis point rate rise by the Fed next week, but also makes the chances of another three hikes this year more likely.
Gold tends not to like higher US bond yields, which often deliver a firmer dollar, and so the precious metal is down another 0.2 per cent to $1,205, its cheapest in five weeks.
Meanwhile, oil prices are fighting to recover after a sharp fall in the previous session prompted by news that US crude inventories surged last week to a record high.
The size of the sell-off came as a shock to traders after more than two months of prices holding in a tight range, with the market seemingly finding equilibrium as Opec production cuts were seen being counteracted by increased output by US drillers.
Speculators had built up near record futures and options bets that prices would eventually break higher.
This meant that when it was revealed on Wednesday that US stockpiles had risen by 8.2m barrels — four times analysts’ forecasts — the bulls had to scramble to close their long positions, adding to the selling. The CBOE Oil Vix jumped 20 per cent on the day to 31.7 as trading volumes ballooned.
Brent crude, the international benchmark that lost 5 per cent, is up 1 per cent on Thursday to $53.63 a barrel. West Texas Intermediate, the main US contract, is recovering 0.7 per cent to $50.62 a barrel after tumbling 5.4 per cent the day before.
US index futures suggest the S&P 500 will open later in the day at 2,365, recovering 2 of the 5.4 points lost on Wednesday when the S&P energy sector lost 2.5 per cent amid the oil price rout.
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