Russia gas flow lifts euro ahead of ECB rate meeting

LONDON, July 21 (Reuters) – Stock markets eased on Thursday as a resumption of Russian gas supplies to Europe lifted the euro ahead of the European Central Bank’s anticipated first interest rate hike in over a decade to quell inflation.

The flow of Russian gas resumed to Germany after a 10-day outage to ease Europe’s supply concerns for now, helping to ease worries about fallout on the economy. read more

The euro edged up, distancing itself further from last week’s parity against the greenback, the recovery bolstered by expectations the ECB might deliver a big 50 basis-point rate hike.

Russian President Vladimir Putin has warned that supplies could be reduced further or even stop, prompting the EU to tells its members to cut usage.

“European markets are going to be pulled and pushed by Putin’s mood,” said Michael Hewson, chief markets strategist at CMC Markets.

Markets are looking to see how much the ECB will raise interest rates later at 1215 GMT on Thursday, with a 25-bps hike already price in, Hewson said. read more

Traders also await details of an ECB tool to contain stress in bond markets, made all the more urgent by a crumbling government in Italy, one of the euro zone’s most indebted countries.

Rate hikes from the U.S. Federal Reserve next week and from the Bank of England in August are also well anticipated by now, Hewson said.

The STOXX index (.STOXX) of 600 European companies was off 0.4%. The MSCI All-Country stock index (.MIWD00000PUS) eased 0.14%.

Italian bonds sold off sharply following the collapse of Mario Draghi’s government in the euro area’s third biggest economy. read more

Nadege Dufosse, head of cross-asset strategy at Candriam, said political turmoil in Italy is putting more pressure on the ECB to have its so-called anti-fragmentation tool in place to cap bond yields and reassure markets.

“I think they will have to deliver on that point, I think it’s the main risk today. It must convince investors that it will be efficient,” Dufosse said.

After the latest series of rate hikes, investors will be trying to gauge whether the economy is headed for a soft or hard landing as higher borrowing costs are absorbed, she said.

“It’s the expectations for the fourth quarter or next year that can really determine the trend in the market. For now we do not have the answer and we just have to be very pragmatic,” Dufosse said.

Bucking the trend, the Bank of Japan left monetary policy unchanged on Thursday, as expected, and raised its inflation forecasts a little bit. The yen held steady at 138.37 per dollar. read more

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