European stocks hit 23-month highs, oil gains

[January 02, 2024]  By Elizabeth Howcroft

LONDON (Reuters) -European stock markets opened higher on Tuesday as traders bet on central banks cutting rates in 2024, oil prices gained after a naval clash in the Red Sea, and Chinese stocks were weighed down by mixed economic data.

Global stock markets rose overall in 2023, having gained particularly in the last two months of the year, while bond yields fell. This upbeat market sentiment continued on Tuesday as traders returned from end-of-year holidays.

The pan-European STOXX 600 rose in early European trading, hitting its highest in nearly two years, up 0.5% on the day at 0829 GMT. Euro zone bank stocks rose to their highest since 2018. London's FTSE 100 was up 0.2% and Germany's DAX was up 0.8%.

The MSCI World Equity index was steady, down by less than 0.1% on the day.

"There is a feeling that (monetary) easing is coming and it seems like there is more to go in the rally in the short term," said Nordea chief analyst Jan von Gerich.

"I think there's a risk to the downside for stocks but the momentum is strong right now," he said.

Data pointing to subdued business confidence in China for 2024 weighed on Chinese assets during Asian trading.

China's manufacturing sector came under pressure from weak demand in 2023, with a property downturn, geopolitical factors and tight-fisted consumers all weighing on the post-pandemic recovery.

China's onshore blue chip index was down 1.3% and Hong Kong's Hang Seng index fell 1.5%.

The U.S. dollar index was up around 0.1% at 101.44, holding relatively steady after it lost roughly 2% last year on bets that U.S. rates will come down.

The U.S. 10-year Treasury yield, which gained overall in 2023, rose to 3.9425%.

Market attention is now focused on economic data due later in the week, including the U.S. non-farm payrolls report on Friday which could provide clues as to the U.S. Federal Reserve's next move. Minutes from the last Fed meeting in December are also expected to give insight into central bankers' thinking regarding rate cuts.

At its December policy meeting, the Fed adopted an unexpectedly dovish tone and forecast 75 basis points in rate reductions for 2024. Other major central banks, including the European Central Bank (ECB) and Bank of England (BoE), have indicated that they will hold rates higher for longer.

A passerby walks past an electric monitor displaying various countries' stock price index outside a bank in Tokyo, Japan, March 22, 2023. REUTERS/Issei Kato/FILE PHOTO

In Europe, flash inflation figures for the euro zone are due on Friday, which RBC Capital Markets analysts said in a note are "likely to be the most significant additional data point prior to the January ECB meeting".

"Anything barring a large increase in inflation would represent a significant surprise," the analysts said.

The euro against the dollar was down around 0.1% at $1.10315.

Euro zone government bond yields rose, with the benchmark 10-year German yield up 8 basis points on the day at 2.106%.

German manufacturing activity continued to contract in December, but expectations for future business turned positive for the first time since April, survey data showed on Tuesday.

Oil prices rose, in a move analysts said was due to an escalation in tensions in the Red Sea as well as hopes for strong demand from China, where investors are expecting fresh stimulus measures.

U.S. helicopters repelled an attack on Sunday by Iran-backed Houthi militants on a Maersk container vessel in the Red Sea, sinking three Houthi boats and killing 10 militants. Investors are weighing up the risks of the Israel-Gaza war becoming a wider regional conflict, which could close crucial waterways for oil transport.

Brent crude rose 1.8% to $78.43 a barrel while U.S. West Texas Intermediate crude was at $72.85 a barrel, up 1.7%.

The head of energy firm E.ON said that instability in the Middle East could send energy prices soaring.

Gold was up 0.6% at $2,074.89 an ounce.

(Reporting by Elizabeth Howcroft and Dhara Ranasinghe; editing by Jason Neely)

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