European shares turn higher as traders reassess rate rise outlook

European stocks started the week higher, after a bounce on Wall Street on Friday, as traders questioned the extent to which slowing growth would impact central banks’ plans to raise rates aggressively.

Europe’s regional Stoxx 600 share index rose 1.2 per cent in early dealings, following its first weekly gain in a month last week.

It remained about 14 per cent lower for the year to date. London’s FTSE 100 added 0.6 per cent on Monday, while the Xetra Dax in Frankfurt rose 0.9 per cent.

Risks of economic contractions in the US and Europe have risen sharply, economists told the Financial Times last week, after Russia’s invasion of Ukraine caused consumer prices to surge worldwide.

But last week, global business surveys that indicated companies were already suffering from tighter financial conditions and weakening consumer demand drove speculation that a recession would cause central banks to scale back plans for aggressive rate rises.

Lower borrowing costs are a boost for equity valuations, but strategists at Morgan Stanley cautioned that European companies’ earnings remained vulnerable to a recession — a scenario that analysts’ profit forecasts had not widely caught up with.

“We expect an [earnings forecast] downgrade cycle to finally kick in over the next couple of months as economic newsflow deteriorates and fading pricing power starts to weigh on corporate margins,” the Morgan Stanley team, led by Graham Secker, said in a note to clients.

It was also “hard to argue” that “any sectors are priced for recession already,” they said.

On Wall Street, futures trading implied the benchmark S&P 500 share index would hang on to a 3.1 per cent gain on Friday to rise 0.7 per cent.

The S&P remains almost 18 per cent lower for the year. But expectations shifted last week of how high the Federal Reserve will raise rates before reversing course, with futures markets pricing in a rise to 3.5 per cent by early 2023, down from 3.8 per cent two weeks ago. The Fed raised its main funds rate by an extra large 0.75 percentage points earlier this month.

In Asia, Hong Kong’s Hang Seng index added 2.4 per cent and the Topix in Tokyo gained 1.1 per cent.

The price of Brent crude oil was steady at $113.46 a barrel, down from almost $123 a month ago.

The yield on the benchmark 10-year US Treasury bond, which sets the tone for debt costs worldwide, rose 0.04 percentage points to 3.16 per cent.

G7 leaders are meeting this week to discuss a price cap on Russian oil, amid warnings from energy sector leaders that Moscow may retaliate by cutting off gas supplies to Europe.

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