LDN - Business

European shares recover some losses after rate expectations shift

[January 18, 2024] By Elizabeth Howcroft

LONDON (Reuters) -European stocks rose in early trading on Thursday, recovering after traders lowered their expectations for major central banks to start cutting interest rates soon.

A combination of higher-than-expected UK inflation data and U.S. retail sales data, as well as hawkish comments from European Central Bank officials, pushed European and U.S. stocks lower on Wednesday, as traders scaled back their expectations for rate cuts.

But European stocks indexes edged higher on Thursday, as markets steadied.

At 0907 GMT, the pan-European STOXX 600 was up less than 0.1% on the day, at 468.05, compared to the previous session's low of 464.99, while Germany's DAX was up 0.2%.

London's FTSE 100 was down by less than 0.1%, but still above Wednesday's seven-week low.

U.S. Treasury yields, which were pushed higher by Wednesday's change in expectations, edged back down on Thursday. The U.S. 2-year yield was at 4.3207%, compared to Wednesday's peak of 4.376%.

Tim Graf, head of macro strategy for EMEA at State Street Global Markets, said that there is "probably still a little bit more to go", in terms of markets reducing their expectations for imminent rate cuts.

"I think that means higher front-end rates and maybe a little bit of a stronger dollar but you're kind of two-thirds of the way there, I would say," he said.

During Asian trading, fears about China's economy led to China's blue-chip stocks index hitting its lowest in five years, and the Shanghai Composite Index fell to its lowest since April 2020. Both recovered over the course of the session.

China's economic recovery from COVID has been shakier than many investors expected, with a deepening property crisis, mounting deflationary risks and tepid demand casting a pall over the outlook for this year.

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A woman walks past a man examining an electronic board showing Japan's Nikkei average and stock quotations outside a brokerage, in Tokyo, Japan, March 20, 2023. REUTERS/Androniki Christodoulou/File Photo

The U.S. dollar index was steady at 103.33, having climbed 1.9% so far in 2024 as investors revised previous expectations that the U.S. Federal Reserve could cut rates as early as March.

The euro was little changed on the day, at $1.0886.

Euro zone government bond yields were steady, with the benchmark 10-year German yield up one basis point at 2.281%.

The European Central Bank is due to publish the minutes of its December meeting, when it decided to bring forward the timing of the pandemic Emergency Purchase Programme's (PEPP) roll-off and signalled that rate cuts were not on the table.

Oil prices were up, helped by OPEC forecasting relatively strong growth in global oil demand over the next two years. But an unexpected build-up in U.S. crude stockpiles and China's struggling economic recovery hurt the outlook for oil demand, analysts said. The International Energy Agency (IEA) made an upward revision to its 2024 oil demand growth forecast.

Brent crude futures were up 0.4% to $78.20 a barrel, while U.S. West Texas Intermediate crude futures rose 0.7% to $73.05.

In the latest rise in geopolitical tensions, Pakistan conducted strikes inside Iran on Thursday, targeting separatist militants, the Pakistani foreign ministry said, two days after Tehran said it attacked Israel-linked militant bases inside Pakistani territory.

State Street Global Markets' Tim Graf said the conflict had not affected broader financial markets.

(Reporting by Elizabeth HowcroftEditing by Ros Russell)

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