Easing inflation fears and dovish ECB push shares up, bond yields down
LONDON (Reuters) – European shares scaled their latest record high and bond yields fell from the United States to the euro zone on Friday as investors shrugged off rising U.S. consumer prices and welcomed signs central banks will stick to loose policy, despite lingering concerns about longer-term inflation.
The Euro STOXX 600 added 0.6% to hit 457.73, their latest in a run of peaks, and was on course for a sixth straight day of gains. London shares gained 0.7%, helped by a 2.3% jump for the mining sector, while Paris climbed 0.8%.
Also boosting sentiment in Europe was the European Central Bank on Thursday raising its growth and inflation projections, while pledging a steady flow of stimulus for now.
The MSCI world equity index, which tracks shares in almost 50 countries, gained 0.1%. Wall Street futures edged up 0.2%.
The U.S. consumer price index posted on Thursday its biggest year-on-year gain since August 2008 of 5%, following a 4.2% rise in April. Hefty contributions from short-term rises in airline ticket prices and used cars cast doubts on underlying inflationary pressures.
The rise in the U.S. consumer price index reflected short-term adjustments related to the reopening of the economy, some economists say. As such, many investors are confident the Federal Reserve is deftly handling a rebound in economic growth – though its definition of “transitory” remains unclear.
At the same time, U.S. Labor Department data showed the lowest level of new claims for unemployment benefits in nearly 15 months last week.
U.S. stocks rallied to record highs on the data, with 10-year U.S. Treasury yields also dipping to a three-month low.
Market players said inflation worries have faded in the last month – even if there is still a spectre of pressure over the long run.
“Peak inflation concern was almost a month ago before the higher prints came in,” said Kiran Ganesh, head of multi asset at UBS Global Wealth Management in London. “Markets seem to be taking the Fed at its word but when we talk to clients there is concern about long-term inflation.”
Euro area bond yields followed suit. Benchmark German 10-year bonds fell 3 basis points to -0.28% and were set for their best week of the year. Yields move inversely with prices.
MSCI’s broadest index of Asia-Pacific shares outside Japan gained 0.3%.
Falling expectations that higher inflation could lead to early Fed tightening prompted a flattening of the U.S. yield curve, with the spread between the 10-year and 2-year yield at its narrowest since late February on Friday.
10-year Treasury yields were last at 1.4468%, on course for the steepest weekly drop in a year. The 30-year yield touched 2.1270%, the lowest since Feb. 26.
Investors said that yields would likely move higher again as economies reopen from coronavirus lockdowns.
“We still think consumers are going to help prices higher, when these economies reopen properly, that people can start travelling again, spending again,” said Jeremy Gatto, investment manager at Unigestion.
“We are going to get a further boost from the consumption side, and we therefore expect bond yields to move higher.”
The U.S. dollar slipped as yields dipped before edging back up.
Against a basket of currencies it was last up 0.2% at 90.214, still hemmed into the relatively tight trading range of this week and down very slightly for the week.
The ECB’s dovish commitment to stick with its elevated tempo of bond buying initially held the euro, though by 1115 GMT it was down 0.2% at $1.2143.
Oil prices rose to fresh multi-year highs and were set for their third weekly jump on expectations of a recovery in fuel demand in the United States, Europe and China as rising vaccination rates lead to an easing of pandemic curbs.
Brent crude futures gained 0.5% to $72.88 a barrel, a day after closing at their highest since May 2019.
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