European shares strain for momentum even after Powell reassurance

LONDON (Reuters) – World shares edged higher and the bond market calmed on Wednesday after reassurances from U.S. Federal Reserve Chair Jerome Powell that the Fed is not rushing to hike rates but European stocks struggled to gain momentum.

The market is still feeling the after-effects of the Fed’s surprise projection for rate hikes as soon as 2023 last week, which knocked stocks, boosted the dollar and prompted the U.S. bond yield curve to flatten.

Powell sought to reassure investors on Tuesday, saying that the central bank will watch a broad set of job market data to assess the economic recovery from COVID-19, rather than rush to raise rates on the basis of fear of inflation.

The MSCI world equity index, which tracks shares in 49 countries, was up 0.1% on the day at 0753 GMT, having recovered from the one-month low it hit in the aftermath of the Fed’s meeting.

But MSCI’s main European Index struggled to gain momentum, down 0.3%. The pan-European STOXX 600 was 0.2% lower on the day but was up around 1.6% from the lows it hit on Monday.

“The market’s still digesting the Fed news,” said Mo Kazmi, portfolio manager and macro strategist at UBP.

“I think a lot of that move was exacerbated by stretched positioning and now what we’re seeing is perhaps reflation trades being put back on and the market normalising to some extent, realising that for now it’s just a subtle shift from the Fed.”

Powell’s comments helped the yield on benchmark 10-year U.S. Treasuries lower and put the brakes on a rising U.S. dollar.

The 10-year U.S. Treasury yield was at 1.4767% at 0801 GMT.

The U.S. dollar slipped as European markets opened, but it remains near multi-month highs after the Fed’s change in tone cleared out a heap of short positions. The euro was steady against the greenback at $1.19385.

“We continue to expect inflation to moderate as base effects and pandemic-related issues fade, while global vaccination efforts and higher earnings support a positive outlook for equities,” wrote UBS strategists in a note to clients.

EUROPEAN GROWTH

Early PMI data showed that euro zone business growth accelerated at its fastest pace in 15 years in June as the easing of more lockdown measures and the unleashing of pent-up demand drove a boom in the bloc’s dominant services industry.

Germany’s private sector growth was also lifted to its highest level in more than a decade in June, the PMI survey showed. In France, business activity edged higher, but not as much as expected.

UBP’s Kazmi said that he is positioned for higher yields in Europe, as it overtakes the United States in terms of vaccinations, lockdown easing and economic recovery from COVID-19.

“It will be interesting to see if the German Bund can follow the U.S. rate move with yields moving higher in Europe – it is something that we think could happen,” he said.

“The fact that the Fed has moved more hawkishly will allow the ECB to be more comfortable perhaps in moving more hawkish, or less dovish, over time.”

Germany’s benchmark Bund yield was steady at -0.168% at 0812 GMT.

Oil prices rose after industry data showed U.S. crude inventories fell more than expected.

Gold edged higher, recovering after it dropped to its lowest since late April after the Fed last week.

Elsewhere, bitcoin was up around 5% on the day, above the $34,000 mark. The cryptocurrency dropped to as low as $28,600 on Tuesday – its lowest since January. Ether was trading around $2,000.

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