Euro, shares and pound fight back after latest energy shock

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  • European shares rise as gas prices pull back from peaks
  • Yen hits new 24-year low, euro, pound claw higher
  • Bond markets expect a super-sized 75 bps from the ECB on Thursday
  • Oil falls after modest OPEC supply cut

LONDON, Sept 6 (Reuters) – European shares, the euro and the pound all rose on Tuesday as previously buoyant gas prices fell back 10%, even as costs in the government bond market continued to rise and the Japanese yen hit a new 24-year low.

The mood was noticeably calmer after Monday’s chilling reaction to Moscow’s latest gas supply cuts. There were also hopes that the UK’s new Prime Minister Liz Truss would launch an immediate aid package there, but the wounds from rising energy costs were clear to see in the markets.

Even the euro’s 0.45% morning gain could not get it above parity /FRX. The STOXX 600 (.STOXX) was up a modest 0.25%, while Italy’s bond yields held close to 4% on bets the European Central Bank will have to raise rates by a record 0.75% later this week.

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“Maybe it’s natural that we’re taking a little breather here, but it’s hard to see where the good news will come from,” said Abrdn chief investment officer James Athey.

Russia’s gas will remain the “sword of Damocles” hanging over Europe’s economy, he added, while the scale of rate rises likely to come and the risk of recessions were still not fully reflected.

“We remain in a strong dollar, weak risk environment for the foreseeable future,” Athey said.

Sterling, which has been one of the world’s weakest major currencies over the past month, rose 0.5% as Liz Truss’s installation as Britain’s new prime minister fueled expectations of a super-sized energy bailout in the coming days.

U.S. stocks appeared to open higher after Monday’s Labor Day holiday, while China’s yuan declined to a more than two-year low in Asia after Beijing’s latest stimulus measures cut foreign reserve requirements again.

However, the most important stock markets there had barely budged. MSCI’s gauge of Asia-Pacific shares outside Japan ( .MIAPJ0000PUS ) ended 0.02% lower and Tokyo’s Nikkei ended almost exactly where it started.

Yen sellers had driven all the action, sending the currency to a new 24-year low of 141.56 against the dollar.

The movements in other crosses were even stronger. The euro jumped 1.2% to 141.2 yen and the pound gained 1.4% to 163.92 yen.

Europe’s currencies have been falling for over a year


In contrast, the Australian dollar was little changed after the Reserve Bank of Australia lifted interest rates by another 50 basis points and signaled more to come, with the caveat that it was not on a pre-set path. read more

“After we saw the break of 140 (for dollar/yen) … the momentum was definitely skewed for yen weakness,” said Galvin Chia, a strategist at NatWest Markets.

“As long as (yield curve control) is in play, and as long as interest rate divergence is in place, one of those side effects will be a weaker yen.”

The European Central Bank is expected to raise interest rates sharply when it meets on Thursday. European energy ministers are set to hold an emergency meeting on the gas crisis on Friday, while the next US central bank interest rate decision is due on 21 September. read more

Deutsche Bank strategist Jim Reid pointed out that markets were now pricing in not only a 75bps rate hike from the ECB on Thursday, but also two more of 50bps by the end of the year, which would cement the fastest-ever lift in borrowing costs.

Back in commodity markets, oil prices fell, paring the previous session’s 3% gain, after an agreement between members of the OPEC+ group to cut output by 100,000 barrels per day in October was seen as largely symbolic.

Brent crude futures fell 0.7% to $95.07 a barrel, extending morning losses. However, US crude oil futures rose 2.12% to $88.71 a barrel.

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Additional reporting by Kane Wu in Hong Kong and Alun John in London; Editing by Susan Fenton

Our standards: Thomson Reuters Trust Principles.

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