European stocks ride China optimism, euro zone yields at highs

[March 03, 2023]  By Elizabeth Howcroft

LONDON (Reuters) - European stocks rose in early trading on Friday, as investor risk appetite was boosted by signs of an economic recovery in China, even after expectations for European Central Bank rate hikes kept government bond yields at their highest in years.

Investors are trying to gauge the path for Federal Reserve rate hikes, after strong U.S. data in recent weeks suggested rates may need to be higher for longer.

But stock markets rose on Wall Street overnight, in a move analysts attributed to Atlanta Federal Reserve President Raphael Bostic saying on Thursday that the Fed should stick to "steady" quarter-point rate hikes.

Gains continued during Asian trading, with investors optimistic about signs that the world's second-biggest economy is making a steady rebound after the Chinese government ditched stringent COVID controls in December.

Activity in China's services sector expanded at the fastest pace in six months in February, driving a solid increase in employment, a PMI survey showed.

At 0940 GMT, the MSCI world equity index, which tracks shares in 47 countries, was up 0.3% on the day and set for a 0.8% rise on the week overall.

Europe's STOXX 600 was up 0.6% and London's FTSE 100 was up 0.2%.

"We seem to be in a tug of war between the China reopening theme which basically means re-rating global growth expectations higher and the Fed re-pricing," said Vasileios Gkionakis, European head of FX strategy at Citi.

Gkionakis said that although risk assets faced headwinds from tighter monetary policy, global demand is picking up.

The German share price index DAX graph is pictured at the stock exchange in Frankfurt, Germany, March 2, 2023. REUTERS/Staff

The recovery in euro zone business activity gathered pace last month, PMI survey data showed.

Euro zone government bond yields were still near their highest in years after euro zone inflation data on Thursday drove market expectations for the ECB's terminal rate to around 4%.

Estonian central bank chief Madis Müller made the case for further ECB rate hikes on Friday, while ECB vice president Luis de Guindos warned of persistent inflation.

The 10-year U.S. Treasury yield edged down to 4.0067% from Thursday's high of 4.091%.

At 2.744%, the benchmark 10-year German yield was at its highest level since 2011 and on track for its biggest weekly rise since December.

The euro was up 0.1% on the day at $1.0609, while the U.S. dollar was down 0.2% against a basket of currencies.

Oil prices slipped, with Brent crude futures down 0.2% and West Texas Intermediate crude futures down 0.3%.

Cryptocurrencies suffered as the crisis engulfing crypto-focused bank Silvergate worsened. Bitcoin was down around 4.7% at around $22,373, its lowest since Feb. 15.

(Reporting by Elizabeth Howcroft; Editing by Alexander Smith)

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