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European stocks tick up as investors shrug off central bank warnings

European stocks inched higher on Monday, as investors weighed cooling inflation on both sides of the Atlantic with warnings from central bank officials that interest rates would probably stay higher for longer than markets expected.

The regional Stoxx Europe 600 added 0.5 per cent, taking its gains for 2023 to 6 per cent, while London’s FTSE 100 rose 0.2 per cent, close to an all-time high. US markets are closed for the Martin Luther King Jr holiday, after Wall Street’s blue-chip S&P 500 notched its largest weekly gain in two months on Friday.

European stocks in particular have benefited from signs of slowing price growth: the roughly 19 per cent outperformance of the MSCI Europe index relative to the MSCI US index in dollar terms over the past 90 days marks the highest return in more than 30 years, according to analysts at Morgan Stanley.

“This does not necessarily signal the start of a multi-year period of European outperformance,” the US bank said in a note, “however, we think there is a good chance that it marks the end of Europe’s persistent, structural underperformance post the [great financial crisis]”. 

The moves come as US inflation fell to its lowest level in more than a year in December, while consumer prices in the eurozone rose at an annual rate of 9.2 per cent, down from 10.1 per cent in November.

Even so, officials at the US Federal Reserve and European Central Bank argue that core inflation, which strips out volatile food and energy prices, remains too high to justify cutting interest rates at any time soon.

Some investors are unconvinced. “Depending on January and February employment, the 25 basis point hike at this month-end may be the last hike,” said Steven Blitz, chief US economist at TS Lombard. “Look for rate cuts to begin by mid-year.”

Rates markets are now pricing a 90 per cent chance that the Fed will lift rates by a quarter of a percentage point when it meets at the beginning of February, down from a 0.5 percentage point rise in December and four 0.75 percentage point moves at the preceding meetings.

A measure of the dollar’s strength against a basket of six currencies rose 0.1 per cent on Monday, though it has slipped about 8.6 per cent in the past three months as the pace of interest rate rises has slowed.

The euro traded flat against the dollar at $1.082, having strengthened 10.1 per cent over the past three months. The yen hit 128.63 against the dollar, close to its highest level in more than seven months, as investors looked ahead to a potentially pivotal Bank of Japan meeting later this week — the last under long-serving governor Haruhiko Kuroda.

In Asia, Hong Kong’s Hang Seng index traded flat, though it has risen 8 per cent so far this year. China’s CSI 300 index of Shanghai- and Shenzhen-listed shares rose 1.5 per cent, taking its January gain to 6.4 per cent. China’s National Bureau of Statistics will on Tuesday release what is likely to be its third consecutive disappointing estimate for quarterly expansion.

In commodity markets, European natural gas prices continued to slide on a warmer than expected winter. Dutch TTF gas futures for the coming month dropped as much as 15.1 per cent to €54.85 per megawatt hour — its lowest level since September 2021, according to data from Refinitiv.

Line chart of Dutch TTF gas future for the coming month (€/megawatt hour) showing European natural gas prices drop to lowest since September 2021

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