Euro reaches three-month record peak as ECB ramps up stimulus

The euro rallied to a three-month high and Italy’s borrowing costs tumbled on Thursday, after the European Central Bank ramped up stimulus to shore up an economy ravaged by the coronavirus pandemic.

The ECB said it would increase the size of emergency bond purchases by 600 billion euros ($674 billion) to 1.35 trillion euros, more than the 500 billion-euro increase many analysts expected.

It added that purchases would run until the end of June 2021, six month longer than originally planned, and that it would reinvest bonds maturing in its pandemic emergency purchase scheme at least until the end of 2022.

“This perfectly fits into the narrative that the ECB is unconstrained, that it is able and willing to mop up issuance in the region in order to navigate it through this crisis,” said Richard McGuire, head of rates strategy at Rabobank.

Italy led a rally in southern European bond markets, with 10-year yields tumbling more than 15 basis points to 1.38% − their lowest since late March. They were on track for their biggest one-day fall since May 18.

The gap between 10-year Italian and German bond yields was at its tightest since late March at around 170 bps.

Spanish and Portuguese 10-year bond yields were down around 7 bps each. Greek bond yields tumbled more than 10 bps to their lowest levels since early March.

The euro rallied to three-month highs at $1.1328 and was last up 0.75% on the day.

European stock markets see-sawed, with a broad measure of European stocks last down 0.3% but off session lows.

“Monday, Tuesday and Wednesday were a great run with the expectation of additional easing. We got that and now it seems that traders are taking the money off the table for now,” said CMC Markets analyst David Madden.

Banking stocks rallied, however, with an index of eurozone banking stocks more than 1% higher on the day.

In a further sign that more stimulus was shoring up investor sentiment, safe-haven German bond yields rose and a key long-term gauge of the market’s inflation expectations rose to a three-month high above 1.05%.

The yield on Germany’s 20-year bond turned positive for the first time since late January, briefly rising to 0.012%.

“What’s different from the GFC (global financial crisis) is it’s clear that central banks are willing to go faster in terms of stimulus, willing to go bigger and for longer. The ECB today is part of that,” said Jack McIntyre, fixed income portfolio manager at Brandywine Global.

“The fact they are talking about keeping stimulus in place until June next year is pretty good. And it isn’t only about monetary policy. It is about fiscal stimulus, too. So you are getting a big one-two punch.”

 Oil prices dropped on Thursday on doubts over the ability of crude producers to agree to extend record output cuts, heightened by worries over a build in US fuel inventories.

Brent crude futures were down 41 cents at $39.38 a barrel at 1357 GMT, heading for their first fall in six sessions. US West Texas Intermediate (WTI) crude futures dropped 64 cents to $36.65.

Saudi Arabia and Russia, two of the world’s biggest oil producers, have agreed to support an extension into July of the 9.7 million barrels per day (bpd) supply cuts backed in April by the OPEC+ group, comprising the Organization of the Petroleum Exporting Countries and other major producers.

But holding an OPEC+ meeting to discuss the cuts remains conditional on a deepening of cuts by countries that have not complied with their targets so far, sources said.

SEB oil market analysts pointed to continuing weak demand keeping the Brent benchmark below $40 a barrel.

Official US data showed gasoline stocks rose by 2.8 million barrels, nearly triple what analysts had expected. Distillate stocks rose by 9.9 million barrels, nearly four times more than expected.

In Asia, the volume of oil products traded during S&P Global Platts’ Market-on-Close process plunged 74% in May from a year earlier, data analysed by Reuters showed.

Striking a bullish note, however, Russia’s Energy Minister said the oil market in July could face a shortage of 3-5 million bpd, Interfax news agency reported.

gold rose more than 1% on Thursday as the dollar retreated and Wall Street paused its recent rally as dismal US trade deficit data overshadowed slightly upbeat jobs numbers and optimism about an economic rebound.

Spot gold rose 0.5% to $1,706.05 per ounce at 10:56 a.m. ET, recovering from a slide to a near one-month low of $1,688.89 in the last session. US gold futures were up 0.4% at $1,710.90.

“Equity markets are still trading in the red and for gold market participants, that’s interpreted as a bout of risk-off and is leading to an increase in investment demand,” said Daniel Ghali, commodity strategist at TD Securities.

Agencies