GLOBAL MARKETS-ECB keeps Europe steady as 13% Google plunge fans AI jitters

Europe's government bond ​and stock markets held their nerve as the European Central Bank paused its run of ‌rate ​hikes on Thursday, though Wall Street was set to drop after Alphabet became the latest tech giant to be hammered by AI worries. Europe's STOXX 600 remained 1% stronger as the ECB kept its key rate at 2.5% while the Nasdaq opened 1.3% lower as Alphabet tumbled over 13% after its results published after market close on Wednesday revealed a hefty AI-related cash burn.

Both ‌the euro currency and euro zone government bond yields were edging lower, meanwhile, as the widely expected hold from the ECB came alongside a dip in oil and natural gas prices that have been driving up inflation since the eruption of the Iran war. Also on Thursday, ECB President Christine Lagarde confirmed, after months of speculation, that she would step down early and leave her post in February.

US Treasury yields - which tend to drive global borrowing costs - also continued to ease despite data showing faster-than-expected US economic growth and a ‌pickup in US inflation. Wednesday also saw a rally in Treasuries after Federal Reserve Chair Kevin Warsh struck a more confident tone on the inflation outlook following the Fed's decision to keep rates steady.

Conor Parle, euro zone economist at Fidelity, said the ECB's ‌rate hold suggested its next hike to 2.75% was now likely in December. "Broad measures of financial conditions have clearly tightened so the ECB will remain vigilant," Parle said.

"In one sense, these tighter financial conditions will do some of the lifting - providing a headwind to inflationary pressures, but it also gives them something else to juggle, particularly if fragmentation between countries grows." The main gauge of French concerns — the yield gap between the country's government bonds and triple-A-rated German Bunds — was at 151 basis points, having hit a near 15-year high of almost 178 basis points last week.

Lagarde's February departure from the ECB meanwhile means French President ⁠Emmanuel Macron and ​other European Union leaders will be able to fill one of ⁠the bloc's most powerful economic positions before France's presidential elections in the spring, which opinion polls suggest far-right candidate Marine Le Pen will win. "This is driven, I would presume, by the French election," SEB Investment Management's head of asset allocation, Carl Hammer, said. "Clearly politics is having an increasingly important role for central banks."

BIG ⁠SPENDERS, BIG FALLS Overnight, earnings proved to be Asia's biggest test. Samsung reported another set of record results thanks to booming demand for its memory chips, but it was silent on plans to boost returns, which sent its shares down 4%.

That weighed on South Korea's KOSPI index, which fell ​1.2% after a nearly 7% surge a day earlier. Another AI darling, SK Hynix, continued to surge though as its plans to return about $75 billion to shareholders this year took its two-day gain past 15%. Early US trading saw ⁠Alphabet plunge 13% after the company reported disappointing results in the firm's core search business and a massive acceleration in cash burn as it poured resources into building out AI.

That focus on AI spending will continue on Thursday, with both Intel and Amazon due to report after US markets close. SEB's Hammer said that rising costs ⁠of ​developing AI were making the outlook "definitely more challenging" for asset allocators following the years-long stock market bull run.

"We are keeping a constructive view as of now (on equities) but it's getting more complicated ... the bulk of the risks in portfolios are driven by the AI infrastructure cycle." OIL DIPS

Markets still price in an 80% likelihood of a rate rise in December despite Wednesday's dovish comments from Warsh, which led to a steepening of the Treasury yield curve. The 2-year Treasury yield fell about 5 basis points ⁠overnight and was last at 4.68%. The dollar edged up against other major currencies after a 0.2% dip on Wednesday following the Fed decision.

The euro edged lower to $1.1125 after the ECB rate decision, having fallen almost 2% this month against the dollar and ⁠2.5% against sterling. Data also show investors have built up their ⁠biggest short position on the euro in a decade, totalling almost $19 billion.

In the commodity markets, Brent futures fell nearly 2% to $113.15 a barrel after the Wall Street Journal reported US Vice President JD Vance had sent a letter to Iranian Security Council chief Mohsen Rezaei in an effort to revive peace negotiations. Qatari mediators have also presented Iran with a new draft deal to end ‌the war, an official briefed on the ‌negotiations told Reuters, though a senior Iranian official dismissed what had been presented as unacceptable ideas that did not amount to an offer.

(Reporting ​by Marc Jones; Editing by Aidan Lewis and Tomasz Janowski)