European Stock Markets Rise as China Eases Restrictions, Dollar Slips Ahead of U.S. Inflation Data
London, August 10, 2023 – European stock markets saw gains on Thursday, thanks to positive news from the luxury sector. This came after China eased some pandemic-era restrictions. Meanwhile, the U.S. dollar slipped ahead of the release of U.S. inflation data, which could influence the Federal Reserve’s policy decisions.
Economists polled by Reuters anticipate a slight increase in July’s U.S. consumer price inflation to an annual rate of 3.3%. The core rate, which excludes the volatile food and energy sectors, is forecasted to rise 0.2% in July, resulting in an annual gain of 4.8%.
“We’re going to see our first rise in headline inflation after 12 consecutive months of falling prices,” said Ben Laidler, a global markets strategist at eToro. Laidler also added that this inflation data will test the “goldilocks narrative” that has supported the market rally, which is the belief that inflation will decrease and allow interest rates to fall.
Markets are currently indicating a more than 50% chance that the Federal Reserve will not implement any further interest rate hikes this year. The CME FedWatch tool reflects this sentiment, as inflation is projected to moderate, and the likelihood of a soft landing increases.
The pan-European benchmark STOXX 600 rose by 0.6% in early European trade. This increase was supported by gains in the luxury sector after China lifted its ban on group tours in the United States and other major markets. Luxury brands such as LVMH performed well, with LVMH rising 2%. France’s CAC 40, which has a higher weighting of luxury names, outperformed other European markets, rising 1.1%. Germany’s DAX gained 0.5%, and Britain’s FTSE 100 was up 0.1%, albeit weighed down by several large-cap companies going ex-dividend.
In contrast, Asian stocks remained near a two-week low, still affected by China’s slip into deflation and the U.S. ban on investments in China’s sensitive technologies. MSCI’s broadest index of Asia-Pacific shares outside Japan was down 0.1%, on track to experience a second consecutive week of losses. The technology sub-index fell to its lowest level in over two months.
Recent data from China has shown deflation at the consumer price level, as well as further declines in factory-gate prices in July. This has raised concerns about the post-pandemic recovery and emphasizes the need for more fiscal support in China to avoid a deflationary trap.
Currency markets saw the U.S. dollar index, which measures the U.S. currency against six peers, ease by 0.3%. The Japanese yen weakened to a one-month low of 144.135 per dollar, approaching the psychologically key level of 145.
In bond markets, the yield on 10-year Treasury notes remained relatively unchanged at 4.0127%, following a successful 10-year note auction on Wednesday. Investors are cautious due to the heavy bond supply expected in the coming quarter. However, signs that markets are absorbing this supply well would be well received.
Bond strategists polled by Reuters expect U.S. Treasury yields to decline in the coming months. The median forecast for the 10-year Treasury note yield is 3.60% in six months.
Oil prices continued to rise, reaching their highest levels since November 2022. This increase is due to extensions to output cuts by Saudi Arabia and Russia. U.S. crude rose by 0.3% to $84.61 per barrel, while Brent was at $87.82, up 0.3% for the day.
Additionally, eyes were on European gas prices, which saw a significant jump of up to 35% on Wednesday, reaching their highest level since June 15. This increase came after news of possible strikes at Australian liquefied natural gas (LNG) facilities, sparking concerns about cargoes moving to Asia. On Thursday, the front-month Dutch contract saw a decrease of 12% to 37 euros per megawatt hour, partially reversing the previous day’s gains.
Samuel Indyk and Ankur Banerjee reporting. Edited by Edwina Gibbs, Sam Holmes, and Susan Fenton.