Stocks gain, oil falls, traders focus on rates outlook

Stocks gain, oil falls, traders focus on rates outlook

By Elizabeth Howcroft

LONDON (Reuters) – European stock indexes rose on Monday as investors focused on the outlook for interest rates ahead of a busy week of central bank meetings and economic data.

Investors are waiting for the outcome of meetings at the Bank of Japan (BOJ) on Tuesday, the U.S. Federal Reserve on Wednesday and the Bank of England (BoE) on Thursday, as well as Chinese manufacturing data on Tuesday and key U.S. jobs data on Friday, all of which will be scrutinised for any clues that central banks have raised interest rates sufficiently to combat inflation and can look towards easing monetary policy again.

The earnings season also continues with Apple, Airbnb, McDonald’s, Moderna and Eli Lilly & Co among the many reporting this week. Results so far have been underwhelming, contributing to the S&P 500’s retreat into correction territory.

At 1152 GMT, the MSCI World Equity Index was little changed, up 0.1% on the day but still near its lowest since late March.

Stocks were subdued in the Asian session, with MSCI’s broadest index of Asia-Pacific shares outside Japan up 0.3%, having hit a one-year low last week.

Europe’s STOXX 600 was up 0.8% and London’s FTSE 100 was also 0.8% higher.

U.S. stock futures were up, suggesting the market gains were set to continue in Wall Street.

The market is looking for “confirmation of the peak rate policy by central banks and any indication that might lead to thinking that perhaps central banks will be in a position to cut (rates) by the middle of next year,” said Samy Chaar, chief economist at Lombard Odier.

Japan’s Nikkei fell 0.95% amid speculation the BOJ might tweak its yield curve control policy when its two-day policy meeting wraps up on Tuesday.

Many analysts expect the central bank will lift its inflation forecast to 2%, but are unsure whether it will finally abandon yield curve control in the face of market pressure on bonds. Yields are already at their highest since 2013 at 0.89%.

In the euro zone, government bond yields were lower, with the benchmark 10-year German yield down 1 basis point at 2.822%.

Investors are betting that rates in the region will stay persistently high, although new data showed inflation in Germany is falling.

Yields on 10-year Treasuries stood at 4.8857%, having climbed around 31 basis points this month. Sentiment will be tested further this week when the U.S. Treasury announces its refunding plans, with more increases likely.

The sharp rise in market borrowing costs has convinced analysts and markets the Federal Reserve will stand pat at its policy meeting this week.

The U.S. dollar index was down around 0.1% at 106.450, and the euro was up 0.2% on the day at $1.05825.

The dollar was flat against the yen at 149.775, below last week’s top of 150.78.

Risk appetite was dulled to some extent by Israel’s push to surround Gaza’s main city in a self-declared “second phase” of a three-week war against Iranian-backed Hamas militants. But analysts said this was just one of a number of factors affecting sentiment.

“It’s easy to blame last week’s declines in equity markets on the unpredictable nature of events unfolding in the Middle East, and while that is part of it, we also saw disappointment on several fronts over poor company updates, and downgrades to guidance which saw some outsized moves lower,” Michael Hewson, chief market analyst at CMC Markets UK, wrote in a client note.

Lombard Odier’s Chaar said that investors would be watching for whether the conflict escalates beyond the region and whether or not it disrupts oil markets.

“If the conflict remains localised and global oil supply is unaffected, basically the market is going to remain much more focused on what happens with rates and what happens with central banks, and what happens with global growth and inflation,” he said.

But, he added, there is some premium on gold, which touched a five-month high of $2,009.29 on Friday. [GOL/]

Oil prices fell by more than 1% as worries about demand outweighed risks to Middle East supplies. [O/R]

(Reporting by Elizabeth Howcroft Additional reporting by Wayne Cole in Sydney; Editing by Mark Potter)