European equities rose cautiously on Thursday as investors balanced positive US corporate earnings with a wave of monetary tightening by central banks.
The regional Stoxx 600 share index added 0.6 per cent in morning trading, lifted by technology and banking stocks. The UK’s FTSE 100 added 0.4 per cent, with sentiment buoyed after Wall Street’s tech-heavy Nasdaq Composite equity gauge rose to its highest level in three months on Wednesday.
The Wall Street rally was driven by better than expected quarterly earnings from PayPal, adding fuel to a recent equity market rebound led by the tech sector that followed the worst first half of the year for US stocks for at least half a decade.
But with annual rates of inflation running at above 9 per cent in both the UK and the US, central bankers on both sides of the Atlantic have expressed determination to raise borrowing costs to reduce demand.
The Bank of England lifted its main interest rate by 0.5 percentage points to 1.75 per cent on Thursday, in its largest rate rise for more than 25 years. It also raised its forecast for inflation to peak at 13.3 per cent this year, up from 11 per cent.
Sterling slipped 0.3 per cent against the dollar to just over $1.21 and UK government debt rose in price, due to fresh worries about the health of the nation’s economy, which the BoE warned would shrink in the final quarter of this year and contract for all of 2023.
The yield on the 10-year gilt fell 0.07 percentage points to 1.85 per cent.
In the US on Wednesday, meanwhile, several Federal Reserve officials moved to dismiss recent market speculation that the central bank would start cutting rates early next year in response to an economic slowdown.
“I think to a large extent this is a bear market rally,” said Willem Sels, global chief investment officer at HSBC’s private bank.
Markets were “incorporating a view that inflation will quickly come down and there will be a big pivot by central banks”, he added, while labelling this optimism as “premature”.
St Louis Fed president James Bullard told CNBC on Wednesday that US interest rates would “probably have to be higher for longer” to reduce inflation from 40-year highs. In a separate appearance, Minneapolis Fed president Neel Kashkari said US rate cuts in 2023 were extremely unlikely.
“The Fed rates message should be clear, but the market isn’t buying [it],” Rabobank strategist Michael Every said.
“I expect market returns to be lacklustre from here,” added Mikhail Zverev, portfolio manager at Amati Global Investors.
“Inflationary pressure has not abated yet and will persist,” he said, “and in terms of company valuations, the interest rate environment will remain unsupportive”.
The two-year US Treasury yield, which tracks monetary policy expectations, was steady at just under 3.1 per cent on Thursday morning, having approached 3.5 per cent in mid June.
The 10-year Treasury yield, which underpins company borrowing costs and mortgage rates, moderated by 0.03 percentage points to 2.71 per cent. Bond yields fall as prices rise.
Futures contracts on Wall Street’s S&P 500 share index gained 0.3 per cent. Those tracking the 100 largest stocks on the Nasdaq added 0.4 per cent.
In Asia on Wednesday, Hong Kong’s Hang Seng share index rose 1.9 per cent, led by tech stocks and as markets looked through heightened tensions between China and Taiwan. China’s CSI 300 stock index added 0.9 per cent and Tokyo’s Nikkei 225 closed 0.7 per cent higher.