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European stocks bounce back on eve of US inflation data

Surging inflation affecting investment sentiment

By AFP - Jan 11,2022 - Last updated at Jan 11,2022

A man walks by the Wall Street Bull by the New York Stock Exchange on Tuesday in New York City (AFP photo)

LONDON — Europe's major equity markets rebounded on Tuesday from recent falls as investors fished for bargain shares on the eve of key US inflation data, dealers said.

In afternoon deals, London stocks added 0.5 per cent, Paris gained 0.8 per cent and Frankfurt won 0.9 per cent, after all three began the week in negative territory.

Wall Street opened lower ahead of a Senate confirmation hearing of Jerome Powell following his renomination as chief of the US Federal Reserve (Fed). 

In his prepared remarks released ahead of his appearance, Powell indicated that the bank is ready to act to prevent inflation from becoming entrenched, reinforcing expectations of interest rate hikes. World oil prices recovered from Monday's drop but the dollar traded mixed.

Bitcoin advanced close to $42,000, one day after the world's most popular cryptocurrency sank below $40,000 on fears of reduced liquidity as a result of US monetary policy tightening.

Richard Hunter, head of markets at Interactive Investor, pointed to "some tentative buying activity... as investors sought to benefit from the recent dips".

However, he cautioned that markets remain overshadowed by surging inflation — and central bank efforts to contain it.

"The backdrop remains unchanged, with the pace and amount of [US] interest rate rises likely to become clearer over the next few sessions in the face of persistent inflation," Hunter added.

On the downside, most Asian indices retreated on lingering concern about the Fed's plans to wind back its financial support measures and lift interest rates within months in order to tackle surging inflation.

Markets are now cautiously awaiting the release of US inflation figures on Wednesday, which could play a major role in the Fed's thinking.

"I'm not sure the inflation data tomorrow is going to put investors' minds at ease, with CPI [consumer price index] seen hitting a multi-decade high above 7 per cent," said market analyst Craig Erlam at Oanda. 

"A higher reading could spook investors once again just as equity markets appear to be stabilising," he added.

While the fast-spreading Omicron coronavirus variant plays on nerves, traders are now coming to terms with the imminent end to the pandemic era of ultra-cheap cash, which helped the economic recovery and fanned a global rally for nearly two years.

A pick-up in consumer activity, surging wages, supply chain problems and rising energy costs are combining to push inflation in several countries to highs not seen for a generation, ramping up pressure on central bankers to act before it gets out of control.

Fed ready to act 

 

Several global central banks have already started hiking borrowing costs, including the Bank of England.

All eyes are now on the US Fed as it tees up its first move, with commentators predicting it will come in March, after it has finished winding up its bond-buying programme.

That could be followed by two or three more by the end of the year, according to analysts.

"Although Jerome Powell has already released his text for the confirmation hearing there will still be chance for him to reveal more at the subsequent Q&A session," said analysts at Moneycorp.

 

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