European stocks drop ahead of ECB policy meeting

European shares edged lower on Thursday ahead of a meeting of the bloc’s central bank, where it is expected to outline plans to raise interest rates in the face of record high inflation.

The regional Stoxx 600 index fell 0.4 per cent in morning trade, with stock markets in the UK, Germany and France all slipping lower.

Eurozone government debt markets were steady as investors awaited a monetary policy statement from the ECB that is expected to spell out the end of its eight-year policy of keeping interest rates below zero. Germany’s 10-year Bund yield, which sets borrowing costs in the eurozone, was flat at 1.35 per cent, around its highest level since 2014.

The ECB has also bought up vast quantities of eurozone government bonds in recent years to lower financing costs, in a program that is expected to formally conclude next month.

“It’s the end of an era of fighting deflation in Europe and breaking one monetary taboo after another,” said Frederik Ducrozet, head of macroeconomic research at the Pictet Wealth Management.

“We are coming back from negative rates and away from a world where everything has been unconventional and exceptional. It’s a big change. ”

ECB policymakers are also believed to have discussed new mechanisms to safeguard weaker nations in the currency bloc, such as Italy, from higher debt costs.

“We expect [the ECB] to hike rates in July and at the next four meetings, ”said Hetal Mehta, senior European economist at Legal & General Investment Management.

“They will probably also intervene verbally to give some comfort to markets,” about preventing any “disproportionate increase in borrowing costs for any one country, although it’s questionable whether they have a credible program to do so”.

The eurozone central bank is tightening monetary policy as part of a global shift to higher borrowing costs to battle soaring inflation.

US data on Friday are expected to show the annual pace of consumer price rises in the world’s largest economy held at above 8 per cent in May.

Consumer prices have surged since industries reopened from coronavirus-related shutdowns and sanctions and supply chain disruptions caused by Russia’s invasion of Ukraine pushed up energy and food costs. US and European government bonds have sold off heavily in anticipation of further inflation and rate rises, while the FTSE All World index of global stocks has lost almost 14 per cent so far this year.

Futures trading implied Wall Street stocks would rise on Wednesday, however, with contracts tracking the blue-chip S&P 500 index adding 0.6 per cent.

The 10-year US Treasury yield, which moves inversely to the price of the benchmark debt security, was steady at just over 3 per cent, reflecting money market bets of the Fed lifting its main interest rate above this level next year.

In Asia, a broad FTSE index of equities outside Japan fell 0.4 per cent, while the Nikkei 225 in Tokyo closed flat.

The yen touched a new 20-year low against the dollar of ¥ 134.55 before settling back to ¥ 133.3.

Traders are betting against the Japanese currency after Bank of Japan governor Haruhiko Kuroda vowed to support the economy with “powerful” monetary stimulus and, in claims he later withdrew, said consumers were “tolerant” of rising prices.

Brent crude, the oil benchmark, edged 0.2 per cent lower to $ 123.2 a barrel, having advanced more than 50 per cent so far this year.

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