European stock markets started the week on an upbeat note as traders queried central banks’ resolve to keep raising interest rates amid mounting evidence of a global economic slowdown.
The regional Stoxx 600 rose 0.5 per cent on Monday, with London’s FTSE 100 adding 1.2 per cent. US equity and bond markets were closed for the July 4 holiday.
The Stoxx has registered weekly losses for four of the past five weeks against a backdrop of surging inflation in the eurozone and the UK, stoked by higher energy prices, with central banks raising borrowing costs in response.
However, after a closely watched survey from the Institute for Supply Management showed the pace of growth in the US manufacturing sector declined sharply in June, money markets have tipped the US Federal Reserve, the world’s most influential bank, to scale back the pace of its rate rises.
Wall Street’s benchmark S&P 500 share index closed 1.1 per cent higher on Friday.
“In these bearish environments, everyone tries to be a bit smart,” said Gergely Majoros, investment committee member at European fund manager Carmignac.
“All the investors are looking for peak inflation and peak central bank hawkishness,” he said, while cautioning that this market narrative may not endure as companies grapple with “this very significant slowing of the economies in the US and Europe”.
Ahead of companies reporting second-quarter earnings, strategists at Liberum said economic data now “indicate a 25 per cent drop in [earnings per share] over the coming 12 months for European companies”.
Analysts following S&P 500-listed companies have forecast a 4.1 per cent increase in second-quarter earnings, on aggregate. This would be the lowest year-on-year profit growth since the final quarter of 2020, according to FactSet.
“We’re going to have pretty weak and jittery markets for the rest of the summer”, said Anna Macdonald, fund manager at Amati Global Investors, as investors navigate “the tension between hoping we’ve reached peak inflation” and the “main risk” of “commodity prices marching higher”.
Brent crude rose 1.9 per cent to $113.75 a barrel on Monday, remaining more than 40 per cent above its level from the start of this year, supported by western nations imposing sanctions on major producer Russia after its invasion of Ukraine.
Eurozone government bond prices fell, following a sharp rally at the end of last week in response to the downbeat ISM survey, as investors calculated the effects of slowing growth on the ability of weaker nations in the bloc to manage their debts.
The yield on Germany’s 10-year Bund, which acts as a barometer for eurozone borrowing costs, rose 0.09 percentage points to 1.32 per cent. Bond yields rise as their prices fall.
Italy’s equivalent bond yield added 0.14 percentage points to 3.32 per cent.
Christine Lagarde, European Central Bank president, last week stuck to the ECB’s plan to tackle record-high inflation with a quarter-percentage point interest rate rise this month — the first such move in more than a decade — with the possibility of a larger increase in September.
Wei Li, global chief investment strategist at BlackRock Investment Institute, said the ECB risked “being hawkish too early” while it “may come back too late, and that’s why the focus is around growth stalling and recession risks”.
