European stocks rise and government debt softens as traders look to tighter policy

European stocks rose, the dollar strengthened and eurozone government bond prices softened on Tuesday as traders anticipated monetary policy tightening on both sides of the Atlantic curb inflation.

The regional Stoxx 600 share index, which remains more than 6 per cent lower for the year, added 0.4 per cent, with gains for financial stocks following comments by the head of the German central bank that interest rates in Europe should rise.

Germany’s Xetra Dax rose 0.2 per cent and London’s FTSE 100 gained 0.2 per cent. Those moves followed a positive session in Asia, driven by expectations of economic stimulus from China.

In government debt markets, the yield on the 10-year German Bund, a barometer for eurozone borrowing costs, rose 0.05 percentage points to 0.49 per cent, its highest since late 2018, as the price of the government debt instrument fell.

The 10-year US Treasury yield stood at about 2.3 per cent, a level not seen since May 2019, after a sell-off overnight prompted by Federal Reserve chair Jay Powell emphasizing the need for tighter monetary policy.

Russia’s invasion of Ukraine has caused sharp jumps in commodities from oil to cotton, exacerbating inflationary pressures caused by resurgent demand following coronavirus shutdowns and prompting markets to predict the Fed raising its funds rate to beyond 2 per cent by December.

“Inflation expectations for the next one to two years are now extremely high,” said Brian Nick, chief investment strategist at Nuveen. “But the scenario where the Fed goes ahead and does what it is signalling it will do is probably the best-case scenario,” he added. “Do too little and inflation becomes further entrenched.”

The US government bond market is experiencing its worst month since 2016 after the Fed raised interest rates last week for the first time since 2018. US consumer price inflation soared to a 40-year high of 7.9 per cent last month.

Powell on Monday said the Fed needed to move “expeditiously” towards tighter monetary policy. In Europe, Bundesbank president Joachim Nagel said the European Central Bank should raise interest rates as soon as this year if the inflation outlook warrants it.

Brent crude steadied on Tuesday at about $116 a barrel. The international oil benchmark is now up almost a fifth since the day before Russia launched its incursion into Ukraine last month.

The dollar index, which measures the US currency against six others, gained 0.3 per cent on Tuesday. The yen dropped 0.8 per cent to 120.4 per dollar, its weakest level in more than six years, providing support for shares of Japanese exporters.

Tokyo’s Nikkei 225 share index closed 1.5 per cent higher, while elsewhere in Asia Hong Kong’s Hang Seng index gained 3 per cent. Chinese markets also rallied last week after vice-premier Liu He made a rare intervention to emphasise the government’s support for the economy and capital markets.

“I would expect more transparency and less surprise around upcoming regulation, but also less actual regulation going forward — and, in general, policies that support growth and help the Chinese economy achieve its goal of a 5.5 per cent growth rate,” said Kristina Hooper , chief global market strategist at US fund manager Invesco.

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