European stocks inch higher ahead of ECB interest rate decision

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European stocks made small gains and yields on German Bunds edged lower on Thursday, as investors awaited an interest rate decision from the European Central Bank later in the day.

European region-wide Stoxx 600 rose 0.3 per cent, following two successive losing sessions, while France’s Cac 40 advanced 0.1 per cent and London’s FTSE 100 gained 0.8 per cent.

Eurozone policymakers are set to decide on whether to keep the region’s benchmark deposit rate unchanged at a record high of 3.75 per cent or raise it by another quarter of a percentage point.

In government debt markets, yields on the policy-sensitive two-year German Bund slipped 0.01 percentage point to 3.15 per cent. Bond yields rise when prices fall.

The euro, which has steadied in recent days after an eight-week losing streak, was flat against the dollar remaining near its lowest level since June.

Swap markets this week have been tipped in favour of a rise, pricing in a 64 per cent probability of rates going up to 4 per cent, their highest level since 1999, on Thursday.

Yet some analysts, including Mohit Kumar, chief Europe financial economist at Jefferies, argued there was “no urgency for the ECB to hike rates”. “Recent data has started to slow [ . . . ] rates are in restrictive territory and trajectory of inflation is lower,” Kumar said.

The policy decision comes amid heightened investor anxiety over a looming economic downturn, with the European Commission having recently downgraded its growth forecast for the 27-country union to 0.8 per cent this year and 1.4 per cent in 2024. 

The ECB has raised borrowing costs at nine consecutive policy meetings since July 2022 in a push to tackle raging inflation. Annual price rises have since decelerated to 5.3 per cent as of August, with some way to go until inflation reaches the central bank’s 2 per cent target.

In recent days, investor and policymaker concerns over stubborn price pressures have grown as oil prices have climbed to a 10-month high on the announcement of supply cuts by some of the world’s biggest producers.

Brent crude, the international benchmark, rose 0.8 per cent to $92.69 a barrel on Thursday, and the US equivalent West Texas Intermediate advanced by the same margin to $89.34.

Stocks that are more sensitive to oil prices led advances in Europe on Thursday, with the Stoxx Europe 600 Energy index up 1.4 per cent, while Stoxx Europe 500 Basic Resources advanced 2.7 per cent.

Rising crude prices translated to a higher than expected headline inflation reading in the US on Wednesday, but they failed to disrupt markets that continued to bet on the Federal Reserve keeping rates unchanged at its next policy meeting.

Futures contracts pointed to Wall Street’s benchmark S&P 500 and the tech-focused Nasdaq Composite opening 0.3 per cent higher later in the day.

In Asia, Hong Kong’s Hang Seng index added 0.2 per cent, while China’s CSI 300 fell 0.1 per cent. Japan’s Topix advanced 1.1 per cent, and South Korea’s Kospi gained 1.5 per cent.

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