Europe should hail Powell’s less aggressive tone than expected

EUROPE SHOULD SALUTE POWELL’S LESS AGGRESSIVE THAN EXPECTED TONE by Laetitia Volga PARIS (Reuters) – The main European stock markets are expected to rise sharply on Thursday at the opening in the wake of Wall Street the day before, after statements by the president of the Federal Reserve (Fed) which, following the announcement of a half-point rate hike, allayed market fears about the extent of future rate hikes. Futures contracts on indices indicate an increase of 2.33% for the CAC 40 in Paris, 2.11% for the Dax in Frankfurt, 1.19% for the FTSE in London and 2.39% for the EuroStoxx 50. The US central bank announced on Wednesday night that it was raising its main interest rate by half a point, its biggest rise in nearly 22 years, and would start shrinking its balance sheet next month. While the institution has clearly hinted that further rate hikes will follow, its chairman, Jerome Powell, has clarified that three-quarter point hikes were not “actively” being considered by members of the Federal Open Market Committee ( FOMC), thus allaying market fears of aggressive monetary tightening. “The Fed simply couldn’t (or, better, didn’t want to) achieve the degree of aggressiveness the market anticipated,” said Brian Daingerfield at NatWest Markets. “I don’t think it’s an overstatement to say that the Fed, for the first time in more than six months, was surprisingly ‘dovish’ relative to market expectations.” The central bank news is not over, with the Bank of England (BoE) due to make its monetary policy announcements at 11:00 GMT. A rate hike of 25 basis points is widely anticipated by the markets. AT WALL STREET After a jagged session, the New York Stock Exchange ended up sharply on Wednesday after the Fed’s announcements. The Dow Jones index gained 2.81% to 34,061.06 points and the Nasdaq Composite rose 3.19% to 12,964.86 points. The S&P-500 rose 2.99% to 4,300.17 points, posting its largest daily percentage gain since May 18, 2020. All eleven major S&P-500 sectors advanced, especially energy ( +4.12%). Bank stocks rose 3.5% as the yield on two-year US Treasuries hit a new high since November 2018, at 2.844%, before falling 13 basis points. Futures contracts on indexes give an opening close to equilibrium for the moment. IN ASIA The Japanese markets remain closed but the stock markets of mainland China, which had been closed since Friday for the Labor Day holidays, benefit from the Powell effect and the promises of support for the economy of the People’s Bank of China . The gains are, however, to be limited by the announcement of a greater contraction in activity in the services and manufacturing sectors in April with the restrictions linked to COVID-19. The Shanghai Composite index gained 0.71% and the CSI300 index was stable. EXCHANGES The dollar is unchanged against a basket of benchmark currencies after having fallen sharply the day before (-0.85%) and reached a one-week low on Thursday on the prospect of lower-than-expected rate hikes. The euro rose in session to 1.0641 dollar, the highest since April 27, before returning to 1.0602. The pound sterling lost more than 0.5% against the dollar and against the euro as the BoE’s decisions approached. “We expect the Bank of England to adopt a dovish (‘dovish’) tone in its communication with the potential negative impacts of rising energy prices on the UK economy,” said Kristina Clifton, analyst at Commonwealth Bank of Australia. RATES On the bond side, the yield on ten-year Treasuries rose to 2.9405% after falling Wednesday in session to 2.901% following statements by Jerome Powell. Its German equivalent fell very slightly in the first exchanges, to 0.968%. OIL The oil market is up, amplifying the previous day’s gains fueled by the European Union’s proposal to include an embargo on Russian oil imports in a new set of sanctions against Moscow for the offensive launched in Ukraine. Brent gained 1.17% to 111.43 dollars a barrel and US light crude (West Texas Intermediate, WTI) advanced 0.99% to 108.88 dollars. (Written by Laetitia Volga, edited by Myriam Rivet)

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