European stock markets started the week on an optimistic note as traders questioned central banks’ willingness to continue raising interest rates amid growing evidence of a global economic slowdown.
The regional Stoxx 600 rose 1% in early trades on Monday, with London’s FTSE 100 adding 0.8% and Germany’s Xetra Dax gaining 0.7%. US stock and bond markets were closed for the July 4 holiday.
The Stoxx has posted weekly losses for four of the past five weeks amid soaring inflation in the euro zone and the UK, fueled by rising energy prices, as central banks raise the costs of loan in response.
After a closely watched survey by the Institute for Supply Management showed the pace of US manufacturing growth slowed sharply in June, however, money markets pushed the US Federal Reserve, the world’s most influential bank , to reduce the pace of its rate increases.
Wall Street’s benchmark S&P 500 stock index closed up 1.1% on Friday.
“In these bearish environments, everyone tries to be a little smart,” said Gergely Majoros, member of the investment committee at European fund manager Carmignac.
“All investors are looking for a spike in inflation and a spike in central bank aggressiveness,” he said, while warning that this market narrative may not last as companies grapple with “this very significant slowdown in the economies of the United States and Europe”.
Ahead of companies reporting second-quarter earnings, Liberum strategists said economic data ‘now points to a 25% decline [earnings per share] over the next 12 months for European businesses”.
Analysts who track S&P 500-listed companies have forecast a 4.1% increase in second-quarter earnings, overall. That would mark the weakest year-over-year earnings growth since the last quarter of 2020, according to FactSet.
Eurozone government bond prices fell on Monday, following a strong rally late last week in response to the downbeat ISM survey. The yield on the 10-year German Bund, which moves inversely to debt prices and acts as a barometer of eurozone borrowing costs, rose 0.03 percentage points to 1.26%. The UK 10-year gilt yield also rose 0.03 percentage point to 2.11%.
Elsewhere, Brent crude rose 0.3% 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 from Ukraine.
The euro was flat against the dollar at $1.043, having fallen more than 8% against the US currency so far this year.