European stocks and euro jump on Ukrainian advances in Kharkiv province

By Samuel Indyk

LONDON (Reuters) – European stocks jumped on Monday after Ukrainian forces made a rapid advance in Kharkiv province in Russia’s worst setback since abandoning its push in Kyiv in March, while the euro extended gains inspired by the European Central Bank last week.

On Saturday, Moscow abandoned its main stronghold in northeastern Ukraine, in a sudden collapse of one of the main front lines of the war after a rapid advance by Ukrainian forces.

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

The German DAX rose 1.4%, the French CAC 40 and the British FTSE 100 both jumped 1%.

Asian stocks also rallied amid slowing trade with China and South Korea on vacation.

MSCI’s broadest index of Asia-Pacific stocks outside Japan rose 0.7%, having rebounded slightly from a two-year low reached last week. Japan’s Nikkei added another 1.2%, after gaining 2% last week.

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

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

News of Ukraine’s advances also helped lift the euro, which extended last week’s gains after the European Central Bank (ECB) hit its highest level against the dollar in nearly four weeks.

The single currency has also been helped in part by a Reuters report that European Central Bank policymakers see a growing risk that they will have to raise their key interest rate to 2% or more to curb record inflation. despite a likely recession.

The euro was last up 1.5% at $1.0194, hitting its highest level against a falling dollar since Aug. 17.

Meanwhile, peripheral eurozone government bonds underperformed their peers, hurt by reports that the ECB could launch a debate next month on reducing the size of their balance sheets.

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

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

“There is an urgent need to anticipate rate hikes and get rates back to neutral as soon as possible,” Mohit Kumar, interest rate strategist at Jefferies, said in a note.

“Once we reach near-neutral levels, we expect doves to regain control at the ECB and therefore see the recent shift as a preload exercise rather than a fundamental shift in ECB policy. ECB,” 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, after gaining 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 near-term travel.

According to a Reuters poll, lower gasoline prices are expected to lower the consumer price index by 0.1%.

The core is expected to rise 0.3%, although some analysts see a chance of a weaker report.

“Commodities, in general, have been down and that’s likely to be the main driver of lower numbers,” PineBridge’s Redha said.

A weak number could reignite speculation that the Federal Reserve will only hike 50 basis points this month, although it would likely need to be very low to have any real impact given the virulence of policymakers policies recently.

Oil prices trended lower on worries about a global economic slowdown, although supply cuts prompted a 4% rebound on Friday. [O/R]

On Monday, Brent was flat at $92.82 a barrel, while U.S. crude slipped 0.2% to $86.60.

Dollar weakness helped lift gold to $1,724 an ounce, a far cry from last week’s low of $1,690. [GOL/]

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

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Joan J. Holland