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ECB warning shot sends euro, bond yields higher

The euro and bond market borrowing costs jumped yesterday, as the European Central Bank signalled its €2.5 trillion stimulus programme could be wound down relatively swiftly this year.

Worries about a US-led trade war and a move from China that poured cold water on a report that it might stop buying US debt had been driving bond and FX markets in the opposite direction until the ECB broke cover and turned the herd.

A message that it could soon revisit the guidance it has carefully kept open on its mass money printing scheme was enough to send the euro jetting back above $1.20 and German Bund yields up five basis points following a morning dip.

Wall Street futures pointed to a modest rise after New York had suffered its first down day of the year on Wednesday.

Europe’s main bourses though continued to slip in and out of the red after Asian and emerging markets had had weak sessions following warnings from both Canada and Mexico that Nafta’s days could be numbered.

The ECB’s warning shot also helped reverse the overnight bounce by US government bonds after China’s regulator said a Bloomberg report on Wednesday that it was considering slowing or halting its US bond purchases, was possibly “fake news”.

The euro surge meant a sudden end too for what had looked like being the dollar’s fourth gain in the last five days having suffered one of its worst years on record in 2017.

Against the yen it was left clinging on 111.45, after hitting a six-week low of 111.27 yen in the previous session when it skidded 1.1 per cent – its largest decline in almost eight months.

US 10-year Treasury yields – which move inverse to prices and are one of the main drivers of global borrowing costs – ricocheted between 2.45 and 2.55 per cent from Wednesday’s 10-month high of 2.597 per cent.

Meanwhile, commodity markets were taking something of a breather after a flying start to the year.

Both Brent and United States West Texas Intermediate (WTI) oil price futures were hovering just off three-year highs at just under $70 and $64 a barrel, while gold ticked over at $1,320 an ounce after spiking to nearly four-month highs.

“In Q1, the balance of risk to Brent lies to the downside, with prices overheating, record net-length built into the futures market and fundamentals set to weaken seasonally,” BMI Research said in a note.

The Nafta worries and nerves that China could be a target of President Donald Trump’s ‘State of the Union’ address later this month sent emerging market stocks down for a third day.

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