LDN - Business

European stocks set for best week in months, US mood turns cautious

[September 15, 2023] By Naomi Rovnick and Kevin Buckland

LONDON/TOKYO (Reuters) -European stocks were set for their best weekly performance in two months, buoyed by hopes that the European Central Bank is ending its rate rise cycle and data that suggested China's wobbly economy may be regaining some momentum.

Europe's Stoxx 600 index, which rose 1.5% on Thursday, gained a further 0.7% on Friday to put it on track for a 2.1% weekly gain, the most since the week ending July 14.

But futures trading suggested Wall Street equities would not extend the rally, as the mood in New York remained cautious ahead of the Federal Reserve's monetary policy meeting next week and investors weighed divergent outlooks for the U.S. and euro zone.

The European Central Bank (ECB) hiked its key interest rate to a record 4% on Thursday and warned it would stay at that level until above-target inflation was dealt with.

Still, markets clung to hopes that the ECB, as the euro zone economy weakens, will wait for more evidence its monetary tightening so far has slowed the economy and then tilt towards rate cuts.

"The key thing for markets is that a dovish hike suggests we are getting closer to the end," said Parisha Saimbi, G10 FX rates strategist at BNP Paribas in London. "They are (also) going to wait for the pass through of monetary policy so far, and to this extent equities are performing well."

Also bolstering European investors' risk appetite on Friday, data showed Chinese gauges of retail sales and industrial output for August topped economists' expectations, though its property slump deepened, threatening to undercut a flurry of support measures.

Analysts had become increasingly pessimistic about the outlook for the world's second-largest economy, as the property downturn fed into weak consumption and rising youth unemployment.

China's central bank's late on Thursday cut banks' reserve ratio requirements for a second time this year, in a move designed to stimulate the economy by increasing the flow of credit to households and businesses.

"When you look at the tactical stimulus Chinese authorities are putting in place and the slight stabilization of the economy, it gives you a reason to start feeling constructive," said Florian Ielpo, head of macro at Lombard Odier Investment Management.

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The German share price index DAX graph is pictured at the stock exchange in Frankfurt, Germany, September 4, 2023. REUTERS/Staff/File Photo

Meanwhile, yields on euro zone government bonds rose on Friday after sharp drops on Thursday, suggesting debt investors were less sanguine on the outlook for ECB policy.

U.S. S&P 500 futures pointed to a 0.1% rise on Friday, after the cash index rose 0.8% on Thursday.

The yield on the two-year U.S. Treasury note, which moves inversely to the price of the debt and tracks interest rate expectations, rose 2 basis points (bps) to 5.01%.

A gauge of the dollar's performance against major currencies also stuck close to a six-month peak it had reached overnight.

U.S. data on Thursday showed producer prices increased by the most in more than a year in August and retail sales also rose more than expected.

Traders are betting the Fed will leave its key interest rate unchanged at 5.25%-5.5% next week. But the possibility that the central bank will keep rates at that level for months to come as the economy avoids a long-predicted recession is dulling the allure of U.S. government bonds for now.

In currency markets, the euro rose 0.2% to $1.066, as it clawed its way off an overnight trough of $1.0632, the lowest level since March 20.

The so-called U.S. dollar index edged down 0.18% to 105.2, after hitting the highest since early March at 105.43 on Thursday. The gauge remains on track for its ninth straight weekly advance, the longest run in nine years.

In commodities, Brent crude futures rose 0.6%, to $90.68 per barrel.

(Reporting by Naomi Rovnick in London and Kevin Buckland in Tokyo; Editing by Stephen Coates, Lincoln Feast, Susan Fenton and Kim Coghill)

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