Euro and stocks surge following ECB rate hike hint

The euro surged above $1.39 yesterday after the head of the European Central Bank hinted a rate hike could come next month and major stock markets posted gains following strong data and results.

The euro surged close to $1.40 after ECB president Jean-Claude Trichet dropped the bombshell, rising as high as $1.3956, its highest level since November 9, 2010.

It later fell to $1.3946 compared with $1.3867 late in New York on Wednesday.

Europe’s main stock markets rose yesterday, with London’s FTSE 100 index of leading shares jumping 1.52 per cent to 6,005.09 points.

In Paris, the CAC 40 climbed 0.65 per cent to 4,060.76 points while in Frankfurt the DAX added 0.62 per cent to 7,225.96 points.

Brussels edged up 0.10 per cent; Swiss stocks added 0.11 per cent and Amsterdam gained 0.75 per cent.

Lisbon lost 0.33 per cent, while Milan fell 0.38 per cent, and Madrid dropped 0.72 per cent.

Analysts had been expecting tough talk from the ECB after the bank’s governing council left its interest rate at a record low of 1.0 per cent.

However, Mr Trichet stunned markets when he said “strong vigilance” was needed on inflation, a code word that has in the past indicated a rate hike is coming the following month.

Most analysts had expected a rate hike only in the second half of this year.

“An interest rate increase in the next meeting is possible, it is not certain,” Mr Trichet said. “This is about as clear a signal of rate hike that you are going to see from a central banker,” commented ABN Amro economist Nick Kounis.

The rate dropped to 1.0 per cent in May 2009, but inflationary pressures have now prompted ECB policymakers to demonstrate their determination to keep price in­creases close to their target of just below 2.0 per cent.

Eurozone inflation hit 2.4 per cent in February and will likely rise further owing to economic growth and surging oil prices fuelled by increased demand and unrest in North Africa and the Middle East.

Mr Trichet’s statement also sent eurozone bond yields climbing. The rate of return for investors on the eurozone benchmark 10-year German bonds rose to 3.325 per cent from 3.195 per cent on Wednesday.

Ahead of the ECB decision, official data confirmed that the 17-nation eurozone economy grew a modest 0.3 per cent in the fourth quarter of 2010, behind the United States but ahead of Japan.

Economists blamed the low growth rate on winter storms curbing activity and slower German and French growth but said overall performances were varied.

In London trading, the main winner was BSkyB, whose share price rallied 2.85 per cent to 821.78 pence after the British government cleared the way for News Corp. to win control of the company after it offered to spin-off the Sky News channel to address competition concerns.

US stocks opened with solid gains after new data indicated steady improvement in the jobs market, and as the dollar dropped on stronger signals of a looming European rate hike.

At 1700 GMT the Dow Jones Industrial Average had climbed 1.36 per cent to 12,230.77, while the broader S&P 500 gained 1.37 per cent to 1,326.35.

The tech-heavy Nasdaq Composite added 1.64 per cent to 2,793.17.

The market jump came after government data showed initial jobless claims dropped to 368,000 in the week ending February 26, the lowest level since late May 2008 – another suggestion that the economic recovery is gaining pace.

A drop in oil prices following a Venezuelan offer to try and mediate the conflict in Libya also helped the market, according to analysts.

Brent North Sea crude for delivery in April fell $1.91 from Wednesday to $114.44 per barrel at 1700 GMT.

New York’s light sweet crude for April, known as West Texas Intermediate, shed $1.13 to $101.08.

Gold also fell on profit-taking, one day after striking a record $1,440.32 per ounce as investors flocked to the safe-haven precious metal amid heightened concerns over unrest in the Middle East and North Africa.

At the evening fixing it was $1,421.50 against $1,435.50 on Wednesday.

Asian stock markets mostly increased yesterday on upbeat US economic news and bargain hunting but optimism was tempered by the crisis in the Middle East and North Africa. Tokyo rose 0.89 per cent and Hong Kong added 0.32 per cent.