European shares, euro jump on Ukrainian advances in northeast

LONDON, Sept 12 (Reuters) – European shares jumped on Monday after Ukrainian forces made rapid advances in Kharkiv province in Russia’s worst setback since its Kyiv push was abandoned in March, while the euro expanded on last week’s European Central Bank inspired rise.

On Saturday, Moscow abandoned its main bastion in northeastern Ukraine, in a sudden collapse of one of the war’s most important front lines after Ukrainian forces made a rapid advance. read more

The broad pan-European STOXX 600 (.STOXX) index rose 0.7% in early trade, hitting its highest since late August.

Germany’s DAX (.GDAXI) rose 1.4%, France’s CAC 40 (.FCHI) and Britain’s FTSE 100 (.FTSE) both rose 1%.

Asian shares also rose in slow trade with China and South Korea on holiday.

MSCI’s broadest index of Asia-Pacific shares outside Japan ( .MIAPJ0000PUS ) rose 0.7%, having rebounded modestly from a two-year low hit last week. Japan’s Nikkei (.N225) rose another 1.2%, after rising 2% last week.

“The Russia-Ukraine situation creates some glimmers of hope for the market that there may be a resolution and provide some relief to the intensity of the energy shock,” said Hani Redha, a multi-asset portfolio manager at PineBridge Investments.

“For now, the balance of information we have interpreted as bullish by the market,” Redha added.

News of Ukrainian progress also helped lift the euro, which extended last week’s gains after the European Central Bank (ECB) to rise to its highest against the dollar in nearly four weeks.

The single currency was also partially helped by a Reuters report that European Central Bank policymakers see a growing risk that they will have to raise key interest rates to 2% or more to curb record inflation despite a likely recession. read more

The euro was last up 1.5% at $1.0194, hitting its highest against a softer greenback since August 17.

Meanwhile, peripheral eurozone government bonds underperformed their peers, hurt by reports that the ECB may start a debate next month on reducing the size of its balance sheet.

Italy’s 10-year government bond yield rose as much as 6.5 basis points to 4.098%, the highest since mid-June.

Germany’s 10-year yield was up 4 basis points, pushing the closely watched spread between Italian and German 10-year yields to as wide as 237 basis points. ,

“There is an urgency to front-load rate hikes and take rates to neutral as soon as possible,” Mohit Kumar, fixed income strategist at Jefferies, said in a note.

“As we reach levels close to neutral, we expect the doves to take back control in the ECB and therefore view the recent shift as a front-loading exercise rather than a fundamental shift in ECB policy,” Kumar added.

The dollar index, which measures the greenback against a basket of six currencies, fell 0.7% to 107.98, its lowest since Aug. 26.

Still, the index is up more than 12% this year, having risen more than 10% against the euro, 13% against the pound and 24% against the Japanese yen.

US inflation data released on Tuesday will be key in determining the direction of travel in the near term.

Falling gasoline prices dragged down the headline consumer price index by 0.1%, according to a Reuters poll.

The core is forecast to rise 0.3%, although some analysts see a chance for a softer report.

“Commodities have generally gone off and that’s probably the main driver of softer numbers,” PineBridge’s Redha said.

A low number could revive speculation that the Federal Reserve will only hike by 50 basis points this month, although it would likely have to be very weak to have any real impact given how sharp hawkish policymakers have been recently. read more

Oil prices have been lower on worries about a global economic slowdown, although supply cuts led to a 4% pullback on Friday.

On Monday, Brent was stable at $92.82 a barrel, while US oil fell 0.2% to $86.60.

The weaker dollar helped lift gold to $1,724 an ounce, off last week’s low of $1,690.

Reporting by Samuel Indyk in London, additional reporting by Wayne Cole in Sydney

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