European stocks rise on economy optimism, euro hits 9-month high

[January 23, 2023]  By Elizabeth Howcroft

LONDON (Reuters) - European stock indexes rose slightly in early trading on Monday, supported by hopes that inflation could be past its peak, as markets softened their expectations for future Federal Reserve rate hikes.

Liquidity was thin overnight as markets in China, Hong Kong, Singapore, Malaysia, South Korea and Taiwan were closed for the Lunar New Year holiday.

At 0947 GMT, the MSCI World Equity index was up 0.3% on the day, holding just below last week's highs.

Europe's STOXX 600 and London's FTSE 100 were both up 0.2% on the day.

Signs of inflation softening, falls in commodity prices and the easing of China's COVID-19 restrictions have raised hopes so far this year that a global economic downturn may not be as severe as feared.

Money markets are pricing in a 98% chance that the Fed will raise rates by 25 basis points next month, and have steadily lowered the likely peak to 4.75% to 5.0%, from the current 4.25% to 4.50%.
 

"The market’s still quite buoyant at the moment," said Peter Chatwell, head of global macro strategies trading at Mizuho, who said markets were being driven by the idea that U.S. inflation has peaked.

"On the surface, it looks like inflation has been dealt with and the most likely path ahead is lower. I’m still cautious about the inflation outlook for the second half of the year," he said.

Wall Street rallied at the end of the last week, after a jump in Netflix and Alphabet shares.

The German share price index DAX graph is pictured at the stock exchange in Frankfurt, Germany, January 20, 2023. REUTERS/Staff

Investors are waiting for euro zone and U.S. flash PMI data on Tuesday, which are expected to show less severe economic contractions than the previous month, according to analysts polled by Reuters. The data is forecast to show more improvement in Europe than in the United States.

The U.S. dollar index was down around 0.3% at 101.59. The euro was up 0.6% at $1.0918, having hit a nine-month high of $1.0927, helped by an easing of recession fears amid a fall in natural gas prices, as well as hawkish comments from European Central Bank governing council member Klaas Knot in an interview on Sunday.

The British pound was up 0.1% at $1.2409 and the Australian dollar, seen as a liquid proxy for risk appetite, was up 0.6% at $0.701.

The dollar edged higher against the yen, up 0.2% at 129.815, having fluctuated last week after the Bank of Japan defied market pressure to ease its ultra-loose monetary policy.

Euro zone bonds were little changed, with the benchmark 10-year German yield at 2.19%.

Oil prices edged higher, with Brent crude up 0.5% and U.S. crude up 0.4%.

(Reporting by Elizabeth Howcroft, Editing by Christina Fincher)

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