Author: Don Obrien

European stocks push higher in week of central bank meetings

European equities on Monday added to a record high hit last week, as investors shrugged off concerns about central bank rate rises in response to high inflation.

The regional Stoxx 600 share index rose 0.6 per cent in morning dealings. London’s FTSE 100 gained 0.5 per cent and futures tracking Wall Street’s S&P 500 climbed 0.5 per cent.

US stock indices also hit all-time highs last week after strong quarterly earnings from corporate bellwethers including Caterpillar and Microsoft.

“Equity markets are responding to the fact investors now see price inflation as being good for earnings” said Savvas Savouri, chief economist at hedge fund Toscafund.

Global stock markets dropped in September as investors feared that price pressures caused by supply chain glitches would harm companies’ profitability. “But we’ve seen far fewer profit warnings than many had expected,” Savouri said. “Companies can keep pace with costs and raise prices into strong demand.”

According to FactSet data, 82 per cent of S&P 500 companies that have reported quarterly earnings so far have beaten analysts’ forecasts.

Monday’s moves came ahead of a set of central bank meetings that could mark the beginning of the end of pandemic-era monetary easing.

The Federal Reserve on Wednesday is expected to announce a reduction of its $120bn a month of bond purchases that have eased financial conditions through the pandemic era.

Meanwhile, traders are anticipating that the Bank of England could begin to raise rates from their current record low at its meeting on Thursday. Central banks in Norway, Poland and Australia also meet this week.

“Fed officials will almost certainly announce the start of tapering,” strategists at TD Securities said. But they also predicted that the world’s most influential central bank would not signal the start of an interest rate “lift-off” and would continue to characterise elevated inflation as a transitory effect of pandemic-driven disruptions to supply chains and the jobs market.

Government bond markets on Monday remained under pressure following choppy trading last week, however.

“The bond markets are beginning to overrun the policymakers and price in a much faster pace of tightening,” Jefferies strategist Sean Darby wrote in a note to clients.

The yield on the two-year Treasury note, which moves inversely to its price, rose 0.02 percentage points to 0.511 per cent, pushing it back towards the one-and-a-half-year high it hit last week.

The yield on the five-year note rose 0.03 percentage points to 1.204 per cent as rate rise expectations lessened the appeal of holding fixed interest-paying securities.

Asian stock markets were mixed on Monday. Tokyo’s Topix closed 2.2 per cent higher after the ruling Liberal Democratic party held its majority in Sunday’s parliamentary election, cementing hopes of more government stimulus spending to counteract the economic shocks of Covid-19.

Hong Kong’s Hang Seng index closed down 0.9 per cent as recent Covid outbreaks in China weighed on business sentiment. China’s official purchasing managers’ index, which collates executives’ responses to questions on topics ranging from hiring plans to new orders, dropped to a reading of 50.8 in October from 51.7 the previous month, just above the 50 watermark that separates expansion from contraction.

Brent crude, the oil benchmark, was up 0.9 per cent to $84.46 a barrel.

Other market moves

  • The yield on the German 10-year Bund jumped 0.07 percentage points to minus 0.082 per cent, having risen higher than minus 0.06 per cent on Friday. Because of negative eurozone interest rates, this benchmark of bond yield has not exceeded zero since May 2019.

  • Australia’s two-year bond yield dropped 0.05 percentage points to 0.56 per cent, after hitting 0.8 per cent last week, as traders bet on the Reserve Bank of Australia moving to end its yield-curve control policy designed to lower borrowing costs across the economy.

  • The dollar index, which measures the US currency against six others, was flat as traders waited for interest rate cues from the Federal Reserve on Wednesday.

  • The Vix, the index of expected volatility on the S&P 500 share index that is dubbed Wall Street’s fear gauge, was steady at a reading of 16.7, having traded at close to its lowest level since the start of the Covid-19 pandemic last week.

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Oliver Bolt

Oliver Bolt

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