LONDON – Strong earnings at Credit Agricole and Lufthansa lifted shares on Thursday as tension over Nancy Pelosi’s visit to Taiwan eased and markets bet the Bank of England would raise interest rates by the most since 1995 to quell inflation.
The STOXX index of leading European companies rose 0.33% after German airline Lufthansa returned to operating profit, while France’s Credit Agricole joined the growing list of bank earnings that beat expectations.
Shares in Hong Kong rose 2%, tracking broader gains in Asia, and suffering some losses after Sino-US friction over a visit to Taipei this week by House Speaker Pelosi, which angered China.
Oil prices rebounded from six-month lows, while the dollar was supported by US Federal Reserve officials resisting suggestions that they would slow the pace of rate hikes, with one saying a 50 basis point rate hike would be “reasonable”.
After massive interest rate increases by the Federal Reserve and the European Central Bank to stem decades of rate hikes, investors expect the Bank of England to follow suit with a 50 basis point increase when it announces the outcome of its monetary policy meeting at 1100 GMT.
The British Pound may struggle in the absence of the hawks’ surprise – especially as the UK economic outlook looks weak while US data provided some bullish surprises.
The British pound was trading at $1.2162, slightly higher on the day.
People tend to go up 50 basis points, which is a likely divided decision. So it’s about how we see the future ahead,” said Michael Hewson, chief market analyst at CMC Markets.
“The UK economy is in a recession and there is nothing they can do about it, and the BoE’s primary focus should be on pulling inflation from its current levels, and the front load just like the Fed does,” Hewson said.
A survey from the European Central Bank showed that consumers in the euro zone are preparing for a contraction in the economy and persistently high inflation.
S&P 500 futures were unchanged ahead of the Wall Street open, with Friday’s non-farm payrolls being a major part of the data for the week.
Earnings not reset yet
Casper Elmgren, head of equities at Amundi Asset Management, said the illusion that decades of high inflation would be temporary has now faded with rising fuel bills and difficulties finding employees.
“The big picture here is that it will take a lot to restore price stability. The danger here is that we underestimate the strength of the force that we are dealing with.”
The second-quarter earnings season currently underway has not provided a major “reset” for what Elmgreen sees as still a very high earnings outlook for 2022 overall given the slowdown in the economy.
“I think this could come in the third or fourth quarter as we start to see a greater impact on demand,” Magyar said.
Wednesday’s ISM survey showed that the US service industry unexpectedly rebounded in July, leading to sell-offs in bonds and gains in US stocks and the dollar, with the Nasdaq rising 2.5% to a three-month high.
Fed officials delivered a hawkish chorus this week, hitting the short end of the yield curve. Two-year Treasury yields were trading at 3.1040%, while 10-year Treasury yields were trading at 2.7318%, both slightly weaker.
The dollar halted its decline that began in mid-July, supported by rising expectations and escalating political tension.
Fed fund futures remain priced to cut interest rates by the middle of next year and the inversion of the US yield curve, with 10-year yields below 2-year yields, suggests investors believe the upward trajectory will hurt growth.
“I think the market will continue to be volatile,” said David Ratliff, head of banking and capital markets for Asia Pacific at Wells Fargo in Hong Kong. “People are starting to read the current round and pace of Fed tightening.”
The dollar index was trading at 106.30, down 0.169%. The euro was bought by the European energy crisis at $1.0185.
Brent crude futures slipped slightly at $96.75 a barrel as supply concerns led to a rebound from multi-month lows on Wednesday after US data indicated weak demand for fuel.
And the price of spot gold rose 0.5% to 1773 dollars an ounce.
(Reporting by Tom Westbrook in Singapore and Kevin Buckland; Editing by Kim Coogle and Mark Potter)