European stocks build on early 2023 gains

European stocks and US futures jumped on Tuesday, continuing a strong start to the new year for equity investors who remain anxious about high interest rates and the risk of recessions across the world.

The regional Stoxx Europe 600 gained 1 per cent, extending gains from an upbeat 2023 debut the previous day. London’s FTSE 100, which was closed on Monday, kicked off the year by rallying 2.1 per cent in early trading. Contracts tracking Wall Street’s benchmark S&P 500 and the tech-heavy Nasdaq 100 both rose 1.1 per cent ahead of the New York open.

December proved a bruising month for US equities, with the S&P 500 falling close to 6 per cent and the Nasdaq Composite losing 8.7 per cent as officials at the Federal Reserve stressed that interest rates were unlikely to fall in 2023 despite slowing inflation. Overall, global stocks and bonds shed more than $30tn in the worst year for markets since the 2008 financial crisis.

The US central bank used its December monetary policy meeting to slow the pace of its interest rate increases, lifting its policy rate to a target range of 4.25 per cent to 4.5 per cent with a half percentage point rise.

The move came after US consumer price inflation eased to its lowest level in almost a year in November, raising hopes among investors that the Fed might lower borrowing costs in 2023.

Officials at the central bank have pushed back against such suggestions, however, arguing that the benchmark federal funds rate will need to rise to between 5 per cent and 5.25 per cent this year, with any cuts coming sometime in 2024. The European Central Bank, too, has warned markets not to expect an end to rate rises this year, even as the region is expected to slide into recession.

Even so, analysts at ABN Amro maintain that “central banks are currently in the process of over-tightening monetary policy and will likely compensate for this by the end of 2023 through cutting rates”. 

A eurozone inflation report due later in the week, along with a batch of US economic data, could help provide further clues on the direction of monetary policy in the two regions, investors said.

In currency markets, the dollar gained 0.9 per cent against a basket of six peers, though it has fallen almost 9 per cent from its September peak. The pound fell 1.1 per cent against the greenback to $1.191, while the euro slipped by the same margin to $1.056.

Asian stocks also rallied, meanwhile, with the Hang Seng index up 1.8 per cent on the day, taking its gains since the start of November to 37 per cent.

China’s CSI 300 index of Shanghai- and Shenzhen-listed shares added 0.4 per cent as the country continued to battle large outbreaks of Covid-19 following the relaxation of measures designed to slow the spread of the virus.