Shares struggle, bond yields jump after bright economic data
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[February 21, 2023] By
Tom Wilson
LONDON (Reuters) - European stocks fell on Tuesday and bond yields
jumped after a pick up in euro zone business activity this month fuelled
predictions that the European Central Bank would remain hawkish as
inflation stays stubbornly high.
Euro zone business activity gathered steam, expanding much faster than
thought, according to a survey, buoyed by a growth in services even as
the manufacturing sector shrank.
Germany's 2-year bond yield, which is the most sensitive to interest
rate expectations, hit a 14-year high of 2.95%. It was last up 3 basis
points at 2.923%.
The Euro STOXX 600 fell as much as 1% before clawing back some of its
losses, and was last down 0.4%. German and French shares also lost about
0.3% respectively.
Also weighing on Europe's benchmark index was Europe's biggest bank HSBC
Holdings Plc, which fell 1% on a cautious outlook even as its quarterly
profit surged.
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"The combination of better-than-expected economic activity at the start
of the year and service sector inflationary pressures which remain
elevated will likely keep the ECB in hawkish mode," analysts at ING
wrote in a note.
The data failed to budge the euro, which remained 0.2% lower at $1.067,
on course to end February lower and break four straight months of gains.
It has lost nearly 2% against the U.S. dollar so far in February.
Other flash PMIs painted a positive picture of economic activity in
Europe.
German business activity returned to growth for the first time in eight
months in February, while France's PMI showed activity grew this month
for the first time since October.
The British pound, meanwhile, gained 0.4% against the dollar to $1.2088
and firmed versus the euro after UK PMI data showed an unexpected bounce
in British business activity, giving hope that the economy could
sidestep a deep recession.
The PMI data, closely watched by investors for pointers towards the
future shape of monetary policy, came at a key time for equity markets,
whose strong start to the year after a bruising 2022 has stalled in
February.
"We are at a pivotal moment, where investors are thinking about
restarting some positions," said Francesco Sandrini, head of multi-asset
strategies at Amundi. "These numbers are really important."
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![](../images/022123PIX/busine40.jpg)
A trader works at the stock exchange in
Frankfurt, Germany, February March 9, 2020. REUTERS/Kai Pfaffenbach
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The MSCI world equity index, which tracks shares in 47 countries,
fell 0.2%.
U.S. flash February PMI data is due later in the day. Wall Street
was set for slim losses with e-mini futures for the S&P 500 last
down 0.7%.
FED FOCUS
Investor focus is also firmly on the release on Wednesday of the
minutes of the Fed's latest meeting earlier this month when it
raised interest rates by 25 basis points.
The dollar index, which measures the U.S. currency against six other
rivals, was last at 104.11, just below a six-week high of 104.67
touched on Friday.
The market is now pricing U.S. interest rates to peak at 5.30% in
July and remain above 5% by the end of the year, moving away from
expectations of deeper rate cuts this year. The yield on 10-year
Treasury notes was up 2.3 basis points to 3.852%, after touching a
three-month high on Friday. The yield of the two-year U.S. Treasury
paper, which typically moves in step with interest rate
expectations, was up 3.5 basis points at 4.658%.
"There is a chance that the European economy proves more resilient
than the U.S.," said Mike Bell, global market strategist at J.P.
Morgan Asset Management, adding that it remained unclear whether
growth in euro zone would be able to stay insulated from any U.S.
slowdown.
Earlier, Asian stocks slid, with MSCI's broadest index of
Asia-Pacific shares outside Japan losing 0.9%.
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Japan's manufacturing activity shrank at the fastest pace in 30
months in February, amid weakening demand and a struggle to tame
cost pressures. The Nikkei closed down 0.2% lower.
(Reporting by Tom Wilson in London and Ankur Banerjee in Singapore;
Editing by Shri Navaratnam, Himani Sarkar and Christina Fincher)
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