LDN - Business

Pivot party lifts European stocks, oil to best week of year

[January 26, 2024] By Marc Jones

LONDON (Reuters) - Europe's share markets were heading for their best week of the year so far and oil was on track for its strongest performance since October on Friday as traders ratcheted up bets that interest rates in major economies will soon be heading down.

Key U.S. inflation data was coming up later for the dollar bulls but Europe's equity and bond markets were in no mood for resting despite a groggy overnight session in Asia.

Upbeat earnings from luxury giant LVMH was driving the pan-European STOXX 600 index to a weekly gain of almost 2.5% as was the interpretation of Thursday's Europe Central Bank meeting that it could be cutting rates by April.

ECB chief Christine Lagarde had stressed it was "premature" to discuss easing but various tweaks in her comments made money markets price an almost 85% chance of a first quarter point rate cut in April and an around 20% chance in March.

Germany's 10-year government bond yield, the benchmark for the euro area, dropped 3.5 basis points to hit 2.25%. Italy's 10-year yield fell 4.5 bps to 3.78%, while the key U.S Treasury note was a fraction lower on both the day and week at 4.12%.

State Street Global Markets' head of global macro strategy Michael Metcalfe said there was now an "interesting contrast" between current market price action and news flow.

"The earnings news flow has been at best mixed and the macro news has been mixed, but it does still fell like it's a hope trade (driving markets) based on rate cut expectations," he said.

"It feels like markets are playing a cat-and-mouse game with central banks, by pricing in more cuts and then waiting to see if they push back."

ECB sources told Reuters that the bank was open to a change in its rhetoric at the next meeting, paving the way for an interest rate cut possibly in June, if upcoming data confirms inflation has been brought under control.

The euro eased 0.1% to $1.0834 and was on track to end the week down 0.6% against a dollar that - measured against top world currencies - is set for its third weekly gain of 2024. [FRX/]

Brent crude drifted down meanwhile after hitting its highest level since November at just over $82 a barrel, helped by the broader risk rally as well as latest data on U.S. crude inventories, which fell to their lowest level since October.

There was also fresh evidence that the Houthi attacks on commercial shipping in the Red Sea were having a broader impact, with Deutsche Bank's Jim Reid pointing out that Drewry’s World container Index was up for a seventh consecutive week.

"That’s now at $3,964 per 40ft container, which is nearly triple its levels from late-October, when costs were at a post-pandemic low," Reid said.

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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

INFLATION GYRATIONS

Asian shares had fallen back overnight as Tokyo's Nikkei and China's markets reversed, but MSCI's broadest index of Asia-Pacific shares ex-Japan still snapped a three-week losing streak with a 1.8% weekly rise.

Though an expected rise in the Fed's favoured inflation measure, the consumption expenditures (PCE) price index, was expected to dominate U.S. focus later, Wall Street futures were pointing down again after a disappointing run of earnings.

Data on Thursday showed the U.S. economy grew faster than expected in the fourth quarter amid strong consumer spending, defying dire predictions of a recession in the world's largest economy.

However, Intel's underwhelming revenue forecasts had pushed its stock some 10% lower in extended trading, which had then sent Asian semiconductor shares toppling on Friday.

Hong Kong's Hang Seng Index slid 1.8%, dragged down by technology names, which knocked the Hang Seng Tech Index down by nearly 4%.

Still, the main index remained on track for a weekly gain of 4%, its best performance in about a month thanks to supportive signals from Beijing this week that have helped steady China's battered markets.

China's central bank announced a deep cut to bank reserves on Wednesday, in a move that will inject about $140 billion into the banking system.

That came a day after reports that Beijing was now seeking to mobilise about 2 trillion yuan ($278.98 billion) as part of a stabilisation fund to buy up beaten up shares.

Investors poured almost $12 billion into Chinese equity funds in the week to Wednesday, a BofA Global Research report calculated on Friday. That marks the largest inflow since 2015 and the second largest ever.

China's CSI blue-chip index dipped 0.3% on Friday but scored a near 2% weekly gain. The Shanghai Composite inched up 0.1% on the day for a 2.5% weekly rise, its largest since July 2023.

"We remain cautious on China, in line with our view for several years," said John Pinkel, a partner and portfolio manager at Indus Capital.

Elsewhere, Japan's Nikkei slid 1.3%, retreating from a 34-year high hit at the start of the week, in part due to rising expectations that the Bank of Japan (BOJ) could soon exit its massive stimulus.

($1=7.1690 Chinese yuan renminbi)

(Additional reporting by Rae Wee in Singapore; editing by Tomasz Janowski)

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