Buoyant mood fades as policy makers warn on interest rates

BLOOMBERG

The buoyant mood sparked by China’s latest economic support measures didn’t last long on Tuesday as European stocks and US futures wavered after policy makers’ warnings of higher-for-longer interest rates.
The Stoxx Europe 600 index pared an early gain after Governing Council member Francois Villeroy de Galhau said the European Central Bank is nearly finished hiking, but added that interest rates will stay at “high plateau” for some time. Trading volumes on the Stoxx Europe 600 were about one-third lower than the 20-day average. The UK’s stock benchmark fell as the latest wage data added pressure on the Bank of England to keep raising rates. Bonds rose, with the German 10-year yield falling three basis points to 2.61%.
Luxury-goods makers, miners and construction companies advanced in Europe after China announced measures to support its ailing real estate sector and signaled there may be more stimulus on the way. LVMH gained more than 1% while L’Oreal SA and Richemont also rose. Daimler Truck Holding AG jumped as much as 3.1% after announcing a stock buyback.
Futures on the S&P 500 and Nasdaq 100 struggled build on  modest gains after several Federal Reserve officials reiterated the need to tighten further this year, fuelling concerns the world’s biggest economy may tip into a recession. Treasury yields fell and a gauge of the dollar declined for a third day.
While central bank officials in Europe and the US are increasingly suggesting they’ve reached a turning point in the battle against inflation, they’re also warning that higher rates for longer are needed to ensure price stability. That’s a mixed blessing for stock bulls who have had to endure a disappointing start to the second half after stellar gains in the first six months of the year. The approaching second-quarter earnings season will give them more food for thought.
“US equity markets have priced in a soft landing, or a more friendly recession, but actually the risk is for the recession to come in harder than expected,” Cecilia Chan, chief investment officer for Apac at HSBC Asset Management, said on Bloomberg TV.
“For developed markets we expect a choppy-waters kind of scenario where it will be more difficult from now on, and we are more conscious of valuations that are on the expensive side.”
US consumer-price data on Wednesday will give further insight into outlook for prices and interest rates. Most Fed policymakers expect to increase rates by a further half percentage point by the end of the year, according to projections released after their June gathering.
The ECB, meanwhile, is all but certain to raise rates by a quarter point on July 27.
Policymakers are debating whether to raise borrowing costs again at their subsequent meeting in September. In the UK, data showed that wage growth held at a level that BOE Governor Andrew Bailey said is fuelling inflation. The data is crucial to shaping the central bank’s next decision on rates in August. The pound rose to the highest versus the dollar since April 2022.
Earlier, a gauge of Asian equities climbed more than 1% with the biggest gains in Hong Kong, South Korea and Taiwan. Asian chip stocks rose after Taiwan Semiconductor Manufacturing Co reported better-than-expected sales and their US peers climbed earlier.
There may be more headwinds for the S&P 500 as profit warnings and fears of higher interest rates combine to threaten US equities, according to the latest Markets Live Pulse survey.
“The surge in government bond yields put some pressure on equities — and highlights that companies will need to deliver on the market’s earnings expectations as the Q2 reporting season gets underway,” BlackRock Investment Institute analysts including Jean Boivin said. Elsewhere, iron ore and other metals rose along with crude oil on hopes China’s stimulus measures will buoy demand.