European stocks ride Fed rate rally coattails

20/11/2015 11:06 AST

European stock markets rebounded yesterday; hopping onto the coattails of a global rally after the Federal Reserve suggested a likely US interest rate increase in December on growing economic confidence.

Meanwhile, the euro shot up above $1.07 as the minutes from the latest European Central Bank meeting didn’t indicate any radical increase in stimulus that would weaken the currency.

Heightened security fears in the wake of the Paris terror attacks and caution ahead of an update from the Federal Reserve had pushed European markets lower on Wednesday.

Stocks rebounded first on Wall Street on Wednesday and then across Asia and Europe yesterday after the release of minutes from the US central bank reinforced expectations of a hike in the interest rate next month.

But European “gains petered out throughout the day after caveated European Central Bank minutes showed officials deliberated increasing stimulus in October but decided that low inflation lasting longer does not necessitate cutting rates or expanding the level of quantitative easing,” said markets analyst Jasper Lawler at CMC Markets UK.

Frankfurt’s DAX 30 nevertheless pushed above the 11,000 mark for the first time since mid-August and closed with a gain of 1.1%. The FTSE 100 index in London added 0.8% and in Paris the CAC 40 won 0.2%.

After hitting a seven-month low at $1.0617 on Wednesday, the euro shot back up to $1.0746 in late European trading on Thursday.

Most analysts still believe the ECB will next month increase its stimulus and perhaps push the deposit rate it charges banks further into negative territory.

On Wednesday, the release of minutes from the Fed’s October 27-28 monetary policy meeting showed most officials expect a rate hike in December and have moved past worries about slowing global growth that had prevented a hike in September.

“Clearly the removal of the uncertainty around the US rate hike is seen as being far more preferable to investors than keeping them at record lows for a little longer,” said Craig Erlam, senior market analyst at Oanda trading group.

“Everyone may not be in agreement that rates should rise but there is a general acceptance now that it’s happening and the market seems capable of dealing with it.”

Fed chief Janet Yellen had said earlier in the year she expected an increase by 2016 but a hike was put off several times during the summer as world markets were hammered by worries about China and the global outlook.

But a string of figures out of Washington recently — particularly on jobs growth and price rises—coupled with an uptick on equities markets, has reignited confidence at the Fed to lift rates for the first time in nine years.

“In reality, the economy is performing more than well enough to cope with a small rate increase from the current record low levels and it’s good to see that the market is moving on from the hysteria surrounding it. The path of rate hikes is far more important than the first,” Erlam added.

Also, a number of Fed policymakers were concerned that, having built up expectations of a hike for so long, not moving would send a disturbing message and erode the bank’s credibility. Despite further good economic news yesterday that would give the Fed more grounds to raise rates, including a fall in new applications for jobless benefits, US stocks failed to gain traction with the Dow down slightly in midday trading.

AFP