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European stock markets rose after Federal Reserve officials said the US economy had recovered enough from the pandemic for emergency financial stimulus to be dialled down, boosting shares in sectors seen to benefit from GDP growth and higher interest rates.
The regional Stoxx 600 share index rose 0.5 per cent, with its banks sub-index gaining 0.9 per cent and energy producers gaining 1.4 per cent. The UK’s FTSE 100 added 0.6 per cent, led by the same sectors.
Patrick Harker, head of the Philadelphia Federal Reserve, told Nikkei that “markets are functioning well”. The US central bank’s $120bn-a-month of bond purchases, introduced in March 2020 to boost lending and spending through the pandemic, “is no longer relevant,” Harker said.
His comments came after Cleveland Fed chief Loretta Mester said on Friday that the US economy had improved enough for the asset purchases to slow.
“The reflation trade indicators are all flashing green,” said Gregory Perdon, co-chief investment officer at Arbuthnot Latham, referring to a strategy that involves buying shares in financial services businesses that benefit from higher interest rates and other stocks whose fortunes are pegged to economic growth.
After the Fed begins to pull back its stimulus spending, its next step may be to raise interest rates from record low levels. Economists polled by the Financial Times expect the first rise next year.
Fund managers have continued to buy stocks in this environment, Perdon said, believing that equities would do better in multi-asset portfolios than government bonds, where yields have been kept low throughout the crisis. Wall Street and European stocks turned lower last week, but the Stoxx and the US S&P 500 index remained close to their all-time highs.
“The inflation data keeps on coming through and that signals that the path for interest rates is higher,” he said.
“There is still a push towards equities because every time we see a bit of red [in stock markets] we think that could be a trading opportunity to buffer potential losses in fixed income.”
Data on Tuesday is expected to show that US consumer price inflation topped 5 per cent in August for the third month in a row.
The yield on the 10-year US Treasury note was steady at 1.338 per cent on Monday, after shooting higher on Friday as traders sold the debt in reaction to US factory gate prices climbing faster than economists had predicted.
The dollar index, which measures the greenback against six key currencies, gained 0.2 per cent. Brent crude, the oil benchmark, gained 0.7 per cent to $73.46 a barrel. The euro fell 0.3 per cent against the dollar to $1.1783.
Futures markets signalled the S&P 500 would gain 0.5 per cent in early New York dealings, while the technology-focused Nasdaq 100 would rise 0.4 per cent.
In Asia, Hong Kong’s Hang Seng index dropped 1.5 per cent after the Chinese government intensified a crackdown on the nation’s tech sector with a move to break up Alipay, an app with more than 1bn users owned by Jack Ma’s Ant Group. The CSI 300 index of mainland Chinese shares lost 0.4 per cent.