Equities rally, euro briefly surges against main rivals

LONDON  — Stock markets rallied on Monday, building on pre-weekend momentum as investors priced in the expectation of further interest rate hikes aimed at taming decades-high inflation.

The euro surged against main rivals, a day after German central bank chief Joachim Nagel signalled that the European Central Bank (ECB) would probably continue raising its key rate.

The European single currency rocketed more than 1.4 per cent against the dollar and 1.6 per cent versus the yen before trimming gains around midday.

The ECB raised the key rate by a historic 75 basis points last week, and markets expect a similar-sized hike at an October meeting.

Paris and Frankfurt stock markets rose by more than 2 per cent in mid-afternoon trading, with London not far behind as data showed the British economy rebounded slightly in July.

Tokyo closed with a gain of more than one per cent thanks to a weaker yen. Markets in Hong Kong, mainland China and South Korea were closed for a public holiday.

Investors worldwide are awaiting key US inflation data for August, due Tuesday, with the consumer price index (CPI) expected to ease slightly to eight per cent — still well above the Fed's 2 per cent target.

Traders expect the Fed to impose another large rate hike next week, after two 75-basis-point increases already.

Clifford Bennett, chief economist at ACY Securities, said he expected stocks to "continue to drift higher" ahead of Tuesday's CPI data.

The inflation print "may well see further improvement as petrol prices have continued to pull back", he said. 

Oil prices gained more than 1 per cent Monday but remain pressured by the possibility of global demand weakening as growth slows and China's harsh zero-COVID policy continues to sap economic activity.

The release on Tuesday of the consumer price index will "provide some telling inflation data that will influence the market's perspective on the Fed's monetary policy approach", analyst Patrick O'Hare of Briefing.com said.