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European stocks rose on Wednesday after soft inflation data in the US bolstered investors’ bets that the Federal Reserve would not increase interest rates when it met later in the day.

Europe’s region-wide Stoxx 600 opened 0.2 per cent higher, as did Germany’s Dax. London’s FTSE 100 rose 0.1 per cent.

Wall Street rallied overnight, with the benchmark S&P 500 index rising 0.7 per cent and pushing higher into the bull market territory it entered last week. The tech-focused Nasdaq Composite gained 0.8 per cent.

Stocks rose after the US consumer price data showed headline inflation had slowed to a year-on-year rise of 4 per cent in May, down from almost 5 per cent in April, reinforcing the widespread market view that the Fed would keep interest rates steady on Wednesday.

“The Fed wants to pause and would need a significant reason to alter that view,” said Mohit Kumar, chief Europe financial economist at Jefferies, noting that the inflation report “did not provide that reason”.

Markets were pricing in a 92 per cent probability that the Fed would hold interest rates steady at the conclusion of its monetary policy meeting on Wednesday, according to data compiled by Refinitiv and based on interest rate derivatives prices.

“Our expectation is that the Fed will leave rates unchanged, in line with market pricing,” said Solita Marcelli, chief investment officer for the Americas at UBS Global Wealth Management. “However, we also expect policymakers to send a clear message to markets that at least one more rate hike is likely at a later meeting.”

The yield on the US two-year Treasury note, which is more sensitive to monetary policy expectations, slipped 0.04 percentage points to 4.66 per cent, while the yield on the 10-year note was down 0.03 percentage points at 3.81 per cent. Bond yields fall as prices rise.

Contracts tracking Wall Street’s benchmark S&P 500 were flat ahead of the New York open, while those tracking the tech-heavy Nasdaq 100 lost 0.1 per cent.

Meanwhile, economists still expect the European Central Bank to raise its deposit rate by another 0.25 percentage points at its meeting on Thursday.

Asian equities were mixed, with Japan’s benchmark Topix index rising 1.3 per cent, while China’s CSI 300 index was flat and Hong Kong’s Hang Seng index lost 0.6 per cent.

Shares in China were buoyed earlier in the day by growing hopes for policy support from the People’s Bank of China after the central bank lowered its short-term lending rate on Tuesday for the first time in nine months.

Analysts at Goldman Sachs said the move “could suggest the start of additional monetary policy easing” and expected the PBoC to cut its one-year medium-term lending facility rate on Thursday by 0.1 percentage points. The rate serves as the floor for China’s benchmark prime loan rate.

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