Oil price surge reignites inflation worries ahead of ECB meeting

By Marc Jones

LONDON, July 23 (Reuters) - A spike in oil prices drove Europe’s government borrowing costs to long-term highs on Thursday as reignited inflation worries left traders bracing for a hawkish meeting at the European Central Bank later in the day.

Share markets were also on the back foot early on, as disappointing earnings from heavyweight chipmaker STMicroelectronics sent its shares tumbling 15% and Google-parent Alphabet's plan to ramp up its AI spending by another $15 billion this year continued to sink in. [.EU]

The main focus though remained on the renewed surge in oil prices - and global borrowing costs - following the re-escalation of the conflict in the Middle East between the United States and Iran.

The Iran-aligned Houthis said on Thursday they had struck two Saudi oil tankers as part of a naval blockade on Saudi Arabia, threatening to create a second chokepoint on global oil supplies alongside Iran's near-closure of the Strait of Hormuz.

Meanwhile, the U.S. military carried out a new round of strikes on Iran at President Donald Trump's direction, marking a 12th successive night of American attacks and prompting further Iranian retaliation.

Brent jumped 4% to nearly $98 a barrel, putting the psychological $100 threshold well within reach and driving Germany's 10-year bund yield — the benchmark for euro zone borrowing costs — above 3.2% for the first time since the woes of the bloc's debt crisis in 2011.

It also sharpened focus on the day's ECB meeting. Markets see just a one-in-five chance of another interest rate hike at this meeting. They do, however, see a four-in-five chance of a hike in September.

"One could argue for a front-loaded hike today, but over previous years the ECB has always fully telegraphed any policy moves in advance," said Michiel Tukker, senior rates strategist at ING.

In contrast to Europe's struggles, Asian main markets rose as investors bet the likes of South Korea's KOSPI, which has surged this year despite some recent volatility, will continue to benefit from the AI boom.

Earnings from Alphabet and Tesla on Wall Street on Wednesday had shown no sign of a slowdown in the vast spending on AI infrastructure, with the search giant sharply raising its capital expenditure plans for the year.

The KOSPI surged more than 4% overnight in Seoul, led by 4.8% and 3.7% respective gains for SK Hynix and Samsung Electronics <005930.KS>. Tokyo's Nikkei and Hong Kong's Hang Seng ticked higher too.

"U.S. megacaps may face more scrutiny because they are writing the cheques, while chipmakers, memory suppliers and infrastructure companies get paid earlier in the investment cycle," said Charu Chanana, chief investment strategist at Saxo in Singapore.

YEN SLIPS BACK TO 40-YEAR LOW

In currency markets, the euro rose towards a one-week high at $1.1429 as traders positioned for the ECB meeting and the potential for hints of a September rate hike. [/FRX]

The Japanese yen was back at a 40-year low versus the dollar though as a brief lift, prompted by a Bloomberg report that Bank of Japan officials were open to raising rates at a faster pace, faded.

Japan's BOJ-sensitive 2-year government bond yield had hit a 31-year high in Tokyo on those faster rate hike bets, while Japan's finance minister issued his latest verbal warnings about possible intervention, saying the government was ready to take decisive forex action as needed.

"The consensus view blames a timid BOJ (for the recent yen fall), but I think the problem is that higher oil prices have dashed hopes of 1.5% GDP growth this year," said Societe Generale FX strategist Kit Juckes.

(Additional reporting by Ankur Banerjee in Singapore; Editing by Joe Bavier)