European shares open higher as investors weigh rate rise outlook

European shares opened the week higher, following losses in the previous session as a red-hot US jobs report added to expectations of aggressive interest rate rises by the Federal Reserve.

The regional Stoxx Europe 600 gained 0.8 per cent in early dealings, with the FTSE 100 up 0.6 per cent.

In Asian markets, Hong Kong’s Hang Seng index slipped 0.7 per cent as concerns over a rising number of Covid cases in some Chinese provinces led tech groups Alibaba and Tencent to slip 4 and 2.4 per cent respectively.

Those moves came after a labour report for the world’s largest economy on Friday showed US unemployment at a 50-year low, with employers adding 528,000 jobs in July — more than double the 250,000 anticipated by economists.

That report preceded a closely watched consumer price index report due on Wednesday. Economists polled by Reuters expect US headline inflation to have increased 0.2 per cent month over month from June to July, down from 1.3 per cent. Core CPI, which strips out volatile categories including food and petrol, is expected to have risen 0.5 per cent.

The S&P 500 fell 0.2 per cent on Friday as traders anticipated that the stronger than expected jobs data would encourage the US central bank to lift interest rates further.

Central banks have in recent weeks shown their willingness to tackle inflation robustly, with the Bank of England, European Central Bank and Federal Reserve all introducing sizeable rate rises despite signs of an economic slowdown.

Trading in Federal Funds Futures show that markets are pricing in the possibility of a third 0.75 percentage point rate rise in a row when policymakers at the Fed meet in September, although Deutsche Bank analysts noted that there would be two further CPI releases before the Fed’s next meeting.

“The monster payrolls report on Friday . . . finally got the message through that the narrative of a dovish Fed pivot . . . was exceptionally premature,” they wrote in a note.

Concerns over interest rate rises dragged down US stocks on Friday but the blue-chip S&P 500 index gained 0.4 per cent for the week. With the tech-heavy Nasdaq Composite also up 2.2 per cent for the week, this marked the first time since the start of April that both indices made three consecutive weekly gains. Futures tracking the indices pointed to further gains later on Monday.

In government bond markets, the yield on the 10-year German Bund fell 0.05 percentage points to 0.91 per cent, as the benchmark debt instrument’s price increased. Bond yields fall when their prices rises.

After the dollar made gains on Friday following the jobs report, the greenback traded broadly flat against a basket of six other major currencies. Brent crude oil rose 1 per cent to $95.95 a barrel.