European stocks outperform as Italy soothes bank tax nerves

[August 09, 2023]  By Naomi Rovnick

LONDON (Reuters) -Global stocks rose on Wednesday, with European equities outperforming as Italy soothed market nerves about a windfall tax on bank profits and Wall Street stock futures pointing to a minor gains ahead of Thursday's U.S. inflation data.

MSCI's broad index of global shares was 0.2% higher in European afternoon trade. Europe's regional Stoxx 600 share index rose 0.9%, with bank stocks around 1.6% higher. Italy's FTSE MIB share index gained 1.8%.

The Italian government shocked markets earlier this week with an announcement of a levy on banks' record profits from sharply higher interest rates, sending European banking shares down 3.5%.

Italy said overnight, however, that the new tax would not exceed 0.1% of banks' assets, reassuring investors who had expected a charge of as much as 0.5%, although questions about a global trend of bank windfall taxes remained.

"The burden-sharing of the costs and benefits from higher rates has a habit of becoming a political issue," Deutsche Bank strategist Jim Reid said.

In the U.S., stock markets were on track to rise as optimism that a peak in inflation could steer the Federal Reserve towards cutting interest rates outweighed jitters about the health of the domestic banking sector.

Futures tracking the S&P 500 share index inched up 0.2% while Nasdaq futures rose by the same amount, following a broad Wall Street sell-off on Tuesday after the downgrade of several lenders by Moody's.

The dollar index, which measures the U.S. currency against a basket of other majors, was steady.

Economists expect data on Thursday to show that the annual rate of U.S. core inflation in July was unchanged from the previous month at 4.8%, while headline inflation picked up slightly to 3.3%.

Small businesses' concerns about inflation fell to the lowest level in almost two years, a report by the U.S. National Federation of Independent Businesses on Tuesday showed.

Signage for the London Stock Exchange Group is seen outside of offices in Canary Wharf in London, Britain, August 3, 2023. REUTERS/Toby Melville

Data out of China on Wednesday showed producer prices in the world's major manufacturing hub fell for a 10th consecutive month in July. China's consumer price index also tipped into deflation for the first time since February 2021.

The data followed disappointing trade figures out of China a day earlier.

U.S. Treasury markets were steady on Wednesday as traders held back from making bets ahead of the U.S. inflation release.

The rates-sensitive two-year yield added 1 basis point to 4.758%.

Ten-year yields were also up 1 bp at 4.024%, after falling 5 basis points overnight to as low as 3.98%, a one-week trough.

Strategists at BCA warned that even though U.S. businesses saw inflation easing, a tight labour market showed that "inflationary risks have not yet been extinguished," meaning the Federal Reserve would remain "reluctant to meaningfully cut interest rates."

Elsewhere, oil prices scaled new peaks, with Brent crude futures touching their highest since April at $86.94 per barrel, boosted by tighter supply from Saudi Arabia and hopes China's government will stimulate the flagging economy. U.S. West Texas Intermediate crude futures added 0.6% to $83.48.

The gold price was unchanged at $1,924.29 per ounce.

(Reporting by Naomi Rovnick. Additional reporting by Stella Qiu n Sydney and Ellen Zhang in Beijing; Editing by Christina Fincher and David Evans)

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