European stocks advance before key US inflation data

Bloomberg

European stocks rose as Covid cases in China eased, while investor attention turned to US inflation data for clues on the path of monetary policy.
The Stoxx Europe 600 Index was up 1.3% by 12:28 pm in London, extending a rebound from a four-week long slump that was sparked by concerns over tightening central bank policies, surging commodity prices and fears of a recession.
Consumer products and automaker stocks led the gains. Health care stocks underperformed, with Roche Holding AG sliding after its cancer medicine billed as a potential blockbuster failed in a study on patients with the most common form of lung cancer. Bayer AG also fell after the Biden administration recommended the US Supreme Court reject a California Roundup appeal.
The European equity benchmark is still down about 13% this year, with investors also worried that strict lockdowns in China to curb the spread of Covid infections would further clog supply chains and dent global economic growth. The Stoxx 600 entered oversold territory earlier this week, which some strategists say sets the stage for a rebound in the index.
“We were oversold and so it’s not surprising to see the market trying to find a bottom,” said Neil Campling, head of TMT research at Mirabaud Equity Research. “Of all the pressures at the moment, the biggest weight has been concerns over the fallout of zero-Covid policies in China, so news today that Covid infections have dropped in Shanghai and Beijing are supportive.”
While the market declines last month have made European stock valuations even more attractive, Morgan Stanley strategists said there’s still room for equities to correct further as the macroeconomic backdrop remains “very difficult.” Strategists at Barclays Plc also said regional investors were turning more defensive amid concerns over slowing growth.
The 10-year rate extended its decline to 20 basis points in the past three days. With the Federal Reserve embarking on a rate-hiking cycle this year to quell surging prices, focus will be on the US numbers, which are expected to show inflation moderated in April but stayed above 8%.
“While the data is expected to ease, stronger-than-expected inflation figures could put pressure on equities if the market thinks a 75-basis point hike at one meeting is back on the table,” said Victoria Scholar, head of investment at Interactive Investor.
Among other individual movers, Compass Group Plc jumped as much as 12%, the most since November 2020, after the catering company reported better-than-expected results for the first half of the year, increased its full-year revenue forecast and announced a share buyback.
Despite the gains, sentiment remains fragile as investors seek evidence that price pressures are peaking in the global economy. US data may show inflation moderated in April but stayed above 8%. Traders will use this information to weigh whether the Fed can continue with its half-point hikes as expected or will need to opt for a three-quarter-point increase.
Asian stocks advanced as China reported fewer Covid-19 cases and technology stocks rallied in Hong Kong. New York-listed Chinese stocks also rose on the news, with Baidu Inc. and Pinduoduo Inc. adding at least 3.5% each.
“A soft inflation read will come as a relief that the Fed doesn’t need to get much more aggressive to bring inflation back towards its 2% policy target,” Ipek Ozkardeskaya, a senior analyst at Swissquote Bank, wrote in a note. “If however, inflation hasn’t pulled lower as expected — and worse, if we see a higher figure than last month print — we would see another big wave of selloff.”
The dollar halted a four-day rally and Treasuries rose across the curve, underscoring the risk-on positions before the inflation report.
The 10-year rate extended its decline to 20 basis points in the past three days. The “bar is low” for a surprise from the US data amid ebbing consumer sentiment, according to Brent Schutte, chief investment strategist at Northwestern Mutual Life Insurance Co.
“Things are going to be just a bit better at the margin,” he said. “The Fed overall is going to tighten less. That will lead to a market that begins to find its feet and move higher in coming quarters as inflation does come off the boil.”
Fed officials reinforced Chair Jerome Powell’s message that half-point hikes are on the table in June and July. But Cleveland Fed President Loretta Mester told Bloomberg Television that “we don’t rule out 75 forever,” referring to a more aggressive, three-quarter-point increase.
In New York premarket trading, Coinbase Global Inc. sank 18% after the largest US cryptocurrency exchange warned of lower trading volume. Occidental Petroleum Corp. gained after posting record profits.
Asian stocks advanced as China reported fewer Covid-19 cases and technology stocks rallied in Hong Kong. New York-listed Chinese stocks also rose on the news, with Baidu Inc. and Pinduoduo Inc. adding at least 3.5% each.
Oil climbed, with West Texas Intermediate futures trading above $103 per barrel. Easing virus cases in China reduced concerns about crippling lockdowns.
Bitcoin erased earlier losses to climb back above $31,000 and futures on the S&P 500 rose 0.9% as of 6:10 am New York time.
While futures on the Nasdaq 100 rise 1.1%, futures on the Dow Jones Industrial Average also climb 0.8%. The Stoxx Europe 600 rises 1% and the MSCI World index also advanced 0.2%. The Bloomberg Dollar Spot Index falls 0.4% and the euro rises 0.3% to $1.0560.
While the British pound rose 0.4% to $1.2371, the Japanese yen rises 0.5% to 129.80 per dollar.
The yield on 10-year Treasuries falls five basis points to 2.94% and Germany’s 10-year yield drops two basis points to 0.98%. Britain’s 10-year yield fall three basis points to 1.82%.
While West Texas Intermediate crude rose 3.3% to $103.03 a barrel, gold futures rise 0.6% to $1,851.50 an ounce.