GLOBAL MARKETS-British rate hike hint boosts sterling, Iraq unrest drives up oil

by Reuters
Friday, 13 June 2014 12:48 GMT

* Sterling surges after clear rate hike talk from BoE * Iraq fighting, weak US data hit risk appetite, buoy yen * Oil nears $115 a barrel * Stocks drop back, Wall Street set for 1st weekly fall in 3 By Marc Jones LONDON, June 13 (Reuters) - Sterling surged on Friday after the Bank of England hinted at an interest rate rise this year, while escalating violence in Iraq drove oil higher and sent equity markets lower. U.S. stock index futures pointed to a lower start for Wall Street, putting the Dow and S&P 500 on track for their first weekly declines in four despite touching record highs earlier in the week. European shares' prospects of a ninth straight weekly rise looked to be dashed as the unrest in Iraq and signs that the era of record low interest rates is near an end, at least in some countries, made investors cautious. Bank of England Governor Mark Carney said late on Thursday that British interest rates could rise sooner than financial markets expect, in a surprisingly stark warning that monetary policy may start to tighten before the end of this year. Markets had previously been expecting a rate hike in the first quarter of 2015. That would make the BoE the first of the four major central banks to raise interest rates and create a big divergence in Europe where the European Central Bank is edging towards the kind of asset buying and lending plans the UK has had in place for years. Sterling neared a five-year high against the dollar on Carney's comments and hit a 1-1/2 year high of 1.2525 euros. The gap between 2-year UK and German yields ballooned to its widest in four years, reflecting just how different BoE and ECB policies are likely to be. "The BoE seems to be slightly ahead of the Fed as far as rate hikes are concerned," said Lutz Karpowitz, currency analyst at Commerzbank. "Macro data is likely to attract particular attention over the coming months. Anything pointing towards a possible rate hike would then support the pound further." Financial markets' focus was otherwise on the rising violence in Iraq where Sunni Islamist militants have surged out of the north this week to menace Baghdad and want to establish their own state in Iraq and Syria. President Barack Obama on Thursday threatened U.S. military strikes in Iraq against the insurgents, who gained more ground overnight. "I don't rule out anything because we do have a stake in making sure that these jihadists are not getting a permanent foothold in either Iraq or Syria," Obama said at the White House when asked whether he was contemplating air strikes. Officials later stressed that ground troops would not be sent in. OIL SPIKE Oil drove sharply higher, with Brent crude slicing through $114 a barrel at one point to a fresh nine-month high and the market looking in a jumpy mood. U.S. crude touched an intraday high of $107.68. Both benchmarks are set to gain almost 5 percent this week, the biggest weekly rise since July 2013. "There have been no disruptions to oil supplies so far but people are very nervous," said Ken Hasegawa, a Tokyo-based commodity sales manager at Newedge Japan. In Asian trading, the yen and gold both benefited from their traditional safe-haven statuses. U.S. Treasury yields also sagged as soft U.S. data added to the renewed sense of caution, a move mirrored by German government bonds in Europe. Weaker-than-expected U.S. retail sales and jobless claims data on Thursday further tempered economic optimism felt earlier in the week that had propelled Wall Street to record highs. Taking its cue from an overnight slide in U.S. stocks, MSCI's broadest index of Asia-Pacific shares outside Japan shed 0.3 percent. Tokyo's Nikkei swam against the tide to rise 0.9 percent on hopes for news of a corporate tax cut, taking its rise over the last three weeks to almost 9 percent. Back with central banks, the Bank of Japan stood pat on monetary policy as its chief Haruhiko Kuroda stressed there was no chance of the bank quitting its stimulus programme before it is confident on inflation. Reaction was more muted towards China's industrial output and retail sales data, which rose in line with forecasts but were not solid enough to show that the world's second-largest economy was on a solid, broad recovery. The dollar edged up 0.3 percent to 102.04 yen but was still stuck near a two-week low of 101.60 hit on Thursday. On the week, the dollar was on course to lose about 0.5 percent against the yen but gain 0.2 percent against a broader basket of currencies. (Additional reporting by Anirban Nag; Editing by Susan Fenton)

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