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 1 per cent in early dealings on Monday, with London’s FTSE 100 adding 0.8 per cent and Germany’s Xetra Dax gaining 0.7 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.
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, however, 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% 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.
Eurozone government bond prices fell on Monday, following a sharp rally at the end of last week in response to the downbeat ISM survey. The yield on Germany’s 10-year Bund, which moves inversely to the price of the debt and acts as a barometer for eurozone borrowing costs, rose 0.03 percentage points to 1.26 per cent. The UK’s 10-year gilt yield also added 0.03 percentage points to 2.11 per cent.
Elsewhere, Brent crude added 0.3 per cent to $112 a barrel as oil prices continued to find support from western nations imposing sanctions on Russia, a major commodity producer, following its invasion of Ukraine.
The euro was steady against the dollar at $1.043, having dropped more than 8 per cent against the US currency so far this year.