European stocks dropped and government bonds sold off sharply after the bloc’s central bank left the door open to an extra large interest rate rise in September.
The regional Stoxx 600 share index extended losses from earlier in the day to trade 1.5 per cent lower, with similar falls across equity markets in Germany, Italy and Spain.
Borrowing costs for the German, Italian, Spanish and Greek governments, as expressed by 10-year bond yields, also raced higher as investors worried about the economic fallout from the end of ultra-supportive monetary policies.
The European Central Bank said in a monetary policy statement that it would lift its main deposit rate from minus 0.5 per cent by a quarter point in July and by another unspecified amount in September.
“If the medium-term inflation outlook persists or deteriorates, a larger increment will be appropriate at the September meeting,” the ECB said.
The central bank, which has also bought up vast quantities of eurozone government bonds in recent years to lower financing costs, confirmed in the same breath that it would end net purchases from July 1 and upgraded its inflation forecasts.
“These are all hawkish signals so there is hawkish market pricing,” said Gero Jung, chief economist at Mirabaud Asset Management.
Germany’s 10-year Bund yield, which sets borrowing costs in the eurozone, rose 0.11 percentage points to 1.42 per cent, hitting a new eight-year high. Italy’s equivalent debt yield surged by 0.2 percentage points to 3.67 per cent, more than triple its level at the start of the year.
“It’s the end of an era of fighting deflation in Europe and breaking one monetary taboo after another,” said Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management.
“We are coming back from negative rates and away from a world where everything has been unconventional and exceptional. It’s a big change.”
The gap between Italy and Germany’s borrowing costs, as expressed by the nation’s 10-year bond yields, hit its highest since May 2020 at 2.15 percentage points after the monetary policy statement.
The eurozone central bank is tightening monetary policy as part of a global shift to higher borrowing costs to battle inflation, which began rising in 2021 as coronavirus shutdowns ended and has been exacerbated by Russia’s invasion of Ukraine.
US data on Friday are expected to show the annual pace of consumer price rises in the world’s largest economy held at above 8 per cent in May.
Futures trading implied Wall Street stocks would follow Europe lower on Thursday, while Treasury bonds also dropped in price. Contracts tracking the blue-chip S&P 500 share index lost 0.3 per cent and those on the tech-heavy Nasdaq 100 fell 0.4 per cent.
The 10-year US Treasury yield rose 0.03 percentage points to 3.06 per cent, reflecting money market bets on the Fed lifting its main interest rate above this level next year.
In Asia, a broad FTSE index of equities outside Japan fell 0.4 per cent, while the Nikkei 225 in Tokyo closed flat. The Japanese yen touched a new 20-year low against the dollar of ¥134.55 before settling back to ¥133.84.
Traders are betting against the Japanese currency after Bank of Japan governor Haruhiko Kuroda said, in claims that he later withdrew, that consumers were “tolerant” of rising prices.
Brent crude, the oil benchmark, edged 0.4 per cent lower to $123.08 a barrel, having advanced more than 50 per cent so far this year.
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