European stocks follow Asian shares higher after signs of Beijing stimulus
European equities and Wall Street stock futures rallied in response to expectations Chinese authorities would unleash a fresh round of economic stimulus, soothing market jitters caused by the war in Ukraine and an anticipated US interest rate rise.
The regional Stoxx 600 share index gained 2.7 per cent on Wednesday morning. Germany’s Xetra Dax added 3.2 per cent, while London’s FTSE 100 added 1.3 per cent. The dollar index, which tends to fall when positive market sentiment reduces demand for the reserve currency, dropped 0.5 per cent.
The moves came after Liu He, Chinese president Xi Jinping’s closest economic adviser, said the government would take measures to “boost the economy in the first quarter”, as well as introduce “policies that are favourable to the market”.
Ukrainian president Volodymyr Zelensky said that talks with Russia were becoming “more realistic” following another night of heavy shelling.
Investors at present view short-term equity market rallies as fragile, put at risk by the unpredictability of the war as well as central banks tightening monetary policy to battle high inflation. The Stoxx remains more than 8 per cent lower for the year while the Dax has lost about a tenth.
“High volatility makes these markets difficult to trade,” said Jeremy Gatto, multi-asset fund manager at Unigestion.
At the conclusion of its monetary policy meeting later on Wednesday, the US Federal Reserve is expected to raise interest rates for the first time since 2018 and signal a path towards further rises this year. The annual pace of consumer price inflation in the US hit a fresh 40-year high of 7.9 per cent in February.
Futures trading implied Wall Street’s benchmark S&P 500 share index would open 1.2 per cent higher while the technology-focused Nasdaq 100 would gain 1.8 per cent.
“We could be in a situation later this afternoon where we get negative news on Ukraine-Russia or the Fed could be more hawkish [about future rate rises] than expected,” Gatto cautioned. “It’s best to stay neutral.”
China’s economy continues to be affected by the nation’s zero-coronavirus policies, which have led to widespread social restrictions and trade disruptions. Shanghai and Shenzhen, two key commerce hubs, are in partial lockdown while Chinese businesses are grappling with western sanctions against Russia pushing up prices of energy, metals and agricultural commodities.
In Asia, Hong Kong’s Hang Seng index closed 9.1 per cent higher as markets across the Asia-Pacific region rallied. The CSI 300 index of mainland Chinese shares rose 4.3 per cent and the Nikkei 225 in Tokyo added 1.6 per cent.
Bank of America strategists said they expected the Fed to raise its main funds rate by a quarter-point at the meeting, while signalling they were willing to go further.
“We expect a hawkish message from Fed chair Jay Powell,” the BofA team said in a note to clients, “who will likely reiterate that the Fed needs to get serious about price stability, though we think he will flag risks to the outlook from the Russia-Ukraine conflict and higher commodity prices”.
The benchmark 10-year Treasury yield, which moves inversely to the price of the US debt security and underpins borrowing costs worldwide, was broadly steady at 2.17 per cent, close to its highest point since May 2019.
The yield on Germany’s 10-year Bund, a barometer for borrowing costs in the euro area, rose 0.06 percentage points to 0.39 per cent, close to its highest level since November 2018.
