Euro rises to near two-week high, yields jump after ECB comments

NEW YORK (Reuters) - The euro rose to a nearly two-week high while the 10-year U.S. Treasury yield hit a 1-1/2-week peak on Wednesday after officials said the European Central Bank could wind down its stimulus program by the end of the year.

FILE PHOTO: A money changer counts Euro banknotes at a currency exchange office in Nice, France November 17, 2017. REUTERS/Eric Gaillard

Robust growth is making the central bank increasingly confident that inflation is on its way back to target, ECB chief economist Peter Praet said on Wednesday, raising the likelihood it may use a meeting next week to reveal more about the end of its bond-buying program.

Praet’s comments pushed the euro to $1.1796, the highest level since May 22. It was last up 0.5 percent at $1.1775. The dollar index fell 0.27 percent.

Jitters that the ECB would buy fewer bonds triggered a broad sell-off in German Bunds and other European government debt, which spilled over to Treasuries, analysts said.

The yield on Germany’s benchmark 10-year bond rose, while the benchmark 10-year Treasury yield was up nearly 6 basis points at 2.975 percent after touching a 1-1/2 week high.

“Bunds were leading the sell-off,” said John Canavan, market strategist at Stone & McCarthy Research Associates in New York. Praet’s comments “pulled forward the ECB move in some people’s mind.”

Higher yields helped to lift S&P 500 financials, which rose 1.8 percent and were the biggest percentage gainer among S&P 500 sectors.

Trade war fears took a back seat, boosting equities, and the Nasdaq registered its third straight record closing high.

White House economic adviser Larry Kudlow said late in the trading day that U.S. President Donald Trump will meet French President Emmanuel Macron and Canadian Prime Minister Justin Trudeau during a G7 summit this week.

While he said Trump is not backing down from the tough line he has taken on trade, the comments appeared to calm investors.

“We’re seeing risk-on behavior. Treasuries are selling off and money is flowing into equities ... the market seems to be OK with the geopolitical headwinds out there,” said Michael O’Rourke, chief market strategist at JonesTrading in Greenwich, Connecticut.

Investors said the new Italian government’s big-spending plans, a major worry for markets over the last few weeks, were unlikely to be helped by the ECB tightening its own policy.

Tesla Inc shares jumped, a day after Chief Executive Officer Elon Musk reassured shareholders that building 5,000 of its mass-market Model 3 cars per week by the end of June was “quite likely.”

The Dow Jones Industrial Average rose 346.41 points, or 1.4 percent, to 25,146.39, the S&P 500 gained 23.55 points, or 0.86 percent, to 2,772.35 and the Nasdaq Composite added 51.38 points, or 0.67 percent, to 7,689.24.

The pan-European FTSEurofirst 300 index lost 0.04 percent and MSCI’s gauge of stocks across the globe gained 0.78 percent.

Oil prices fell on worries that global supply is climbing after U.S. inventories rose unexpectedly and Saudi Arabia and other big producers signaled they may raise production.

U.S. crude fell 79 cents to settle at $64.73 a barrel, while Brent dipped 2 cents to $75.36.

Gold prices were steady, with spot gold flat at $1,295.80 per ounce.

Additional reporting by Richard Leong, Gertrude Chavez-Dreyfuss, and Jessica Resnick-Ault in New York, Alasdair Pal in London and Shinichi Saoshiro in Tokyo; editing by Hugh Lawson, James Dalgleish and Susan Thomas