European equities rose on Tuesday after a bout of global market volatility in the previous session, driven by expectations of the US Federal Reserve raising interest rates in response to inflationary pressures.
The regional Stoxx 600 share index, which like other global stock markets is influenced by US monetary policy that underpins corporate borrowing costs and share valuations worldwide, opened 1 per cent higher.
The European stock gauge had fallen 1.5 per cent on Monday in its worst daily performance since November, during a session when Wall Street’s technology-focused Nasdaq Composite briefly dropped into correction territory as traders fled richly valued technology shares. The index later closed the New York session up by just under 0.1 per cent, with the Stoxx tech sub-index echoing this turnround on Tuesday morning, gaining 2.2 per cent.
London’s FTSE 100 added 0.6 per cent, while futures contracts that bet on the direction of Wall Street’s S&P 500 index were flat.
Following strong US jobs data last week, and ahead of inflation figures on Wednesday that economists polled by Reuters expect to show US consumer prices rose by 7 per cent in the year to December, markets have priced in the Fed’s first rate rise of the pandemic era by March. Goldman Sachs, the investment bank, expects four US rate increases this year.
“Its all about the Fed now and nothing else really matters,” said Hani Redha, portfolio manager at PineBridge Investments.
The US central bank, which began buying about $120bn of Treasuries and mortgage-backed securities a month in March 2020 to suppress borrowing costs and insulate markets from the shocks of coronavirus, has already reduced its purchases and is preparing to shrink its $9tn balance sheet.
Quantitative easing, said Redha, “had led investors further along the risk curve,” by raising the prices and reducing the income yields on bonds, “so you go to equities and then you go into the more speculative areas like unprofitable technology companies”.
“Now all that goes into reverse as they shrink the balance sheet and drain excess liquidity from the system.”
But Anatole Kaletsky, analyst at research house Gavekal, argued it made sense to “buy the dip” following the Nasdaq correction. “Inflation is peaking, and in any case is not as bad as it looks,” he said. “The year-on-year inflation rates everyone is panicking about are misleading because they include large paybacks for the collapse in prices in the first year of the pandemic.
“Governments and central banks have obvious incentives to keep borrowing costs down,” he added, because of high levels of government and corporate debt that had built up during the era of ultra-low interest rates.
The yield on the benchmark 10-year US Treasury note dipped 0.02 percentage points lower to 1.76 per cent, after trading above 1.8 per cent on Monday. Government bond prices tend to fall in response to expectations of higher interest rates and inflation, which lower the real returns from the fixed-income paying securities. Germany’s 10-year Bund yield was steady at minus 0.03 per cent.
In Asia, Hong Kong’s Hang Seng share index edged 0.1 per cent lower and Tokyo’s Nikkei 225 fell 0.9 per cent. Brent crude, the energy benchmark, added 0.8 per cent to $81.53 a barrel.