European shares, euro jump on Ukrainian progress in northeast By Reuters

By Samuel Indyk

LONDON (Reuters) – European shares rose on Monday after Ukrainian forces made rapid progress in Kharkiv province in Russia’s worst setback since the country’s Kyiv push was abandoned in March, while the euro extended last week’s European Central Bank inspired gains.

On Saturday, Moscow abandoned its main bastion in northeastern Ukraine, in a sudden collapse of one of the main front lines of the war, after Ukrainian forces made a rapid advance.

The broad pan-European index rose 0.7% in early trade, hitting its highest since late August.

rose 1.4%, 40 and 100 both rose 1%.

Asian shares also rose in slow trade with China and South Korea on holiday.

MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.7%, after rising modestly from a two-year low hit last week. added another 1.2% after rising 2% last week.

“The situation between Russia and Ukraine creates some glimmers of hope for the market that there may be a solution and provide some relief from the intensity of the energy shock,” said Hani Redha, a multi-asset portfolio manager at PineBridge Investments.

“Currently, the balance of information we have is being interpreted as bullish by the market,” Redha added.

News of Ukrainian progress also helped lift the euro, extending last week’s gains after the European Central Bank (ECB) to rise to its highest against the dollar in nearly four weeks.

The single currency was also helped in part by a Reuters report that European Central Bank policymakers see a growing risk that they will need to raise their key interest rate to 2% or more to curb record high inflation despite a probable recession.

The euro was last up 1.5% at $1.0194, its highest against a weakening dollar since August 17.

Meanwhile, peripheral eurozone government bonds underperformed their peers, hurt by reports that the ECB may next month kick off a debate on reducing the size of its balance sheet.

Italy’s 10-year government bond yield rose as much as 6.5 basis points to 4.098%, the highest since mid-June.

Germany’s 10-year yield rose 4 basis points, pushing the closely watched spread between Italian and German 10-year yields to as wide as 237 basis points.

“There is an urgency to accelerate rate hikes and bring rates to neutral as soon as possible,” Mohit Kumar, interest rate strategist at Jefferies, said in a note.

“As we reach levels close to neutral, we expect the doves to take back control in the ECB and hence view the recent shift as a front-loading exercise rather than a fundamental shift in ECB policy,” Kumar added.

The , which measures the dollar against a basket of six currencies, fell 0.7% to 107.98, its lowest since Aug. 26.

Still, the index is up over 12% this year, after rising over 10% against the euro, 13% against the pound and 24% against the Japanese yen.

US inflation figures released on Tuesday will be key in determining the direction of travel in the near term.

Falling gasoline prices are seen pulling the headline consumer price index down 0.1%, according to a Reuters poll.

The core is expected to rise 0.3%, although some analysts see a chance for a softer report.

“In general, commodities are coming out and that’s probably the main driver of softer numbers,” PineBridge’s Redha said.

A weak number could revive speculation that the Federal Reserve will only hike by 50 basis points this month, although it would likely have to be very weak to have any real effect, given how hawkish policymakers have been recently.

Oil prices have been falling on worries about a global economic slowdown, although supply cuts led to a 4% gain on Friday. [O/R]

Monday was steady at $92.82 per barrel, while it fell 0.2% to $86.60.

The weaker dollar helped lift gold to $1,724 an ounce, off last week’s low of $1,690. [GOL/]