July 19, 2023

European stocks saw an increase on Wednesday as UK inflation dropped more quickly than expected, further fueling hopes among investors that central banks might soon end their historic tightening measures. At the opening bell, the broader Stoxx 600 index in Europe rose by 0.5%, extending gains from the previous session. The CAC 40 in France climbed by 0.7%, while Germany’s DAX advanced by 0.5%. Leading the gains in the region, London’s FTSE 100 surged by 0.9% after official data revealed that UK inflation slowed down beyond analysts’ predictions.

This provided some relief to the Bank of England ahead of its upcoming monetary policy decision in August. The Office for National Statistics reported that the UK’s annual consumer price inflation eased to 7.9% in June, compared to the previous month’s 8.7%, falling below the 8.2% forecast by economists surveyed by Reuters. This reading marked the end of a four-month streak of UK price growth surpassing expectations, reducing pressure on policymakers at the Bank of England who have already raised interest rates to their highest level since 2008 at 5%.

Market analyst Jamie Dutta from Vantage expressed that the cooling in UK inflation was a much-needed relief for both policymakers and the government. This positive news came after slower-than-anticipated US inflation last week, which also boosted global markets. The FTSE 100 index, comprising the largest London-listed companies, had been trailing behind its regional counterparts since the beginning of the year due to concerns that persistent price pressures in the UK would lead the central bank to maintain higher interest rates for an extended period. However, the inflation reading on Wednesday increased the likelihood of the Bank of England’s Monetary Policy Committee raising rates by 0.25 percentage points at their next meeting in August, rather than a 0.5 percentage point increase.

Chris Beauchamp, chief market analyst at IG Group, mentioned that a single slower Consumer Price Index (CPI) print was not sufficient to prompt a policy change, but Andrew Bailey, the governor of the Bank of England, and his team would hope that it marked the beginning of a trend. Following the release of the data, the pound declined by 0.68% against the dollar, reaching its lowest level in a week at $1.2943.

The rally in European equities also received support from remarks made by Klaas Knot, a member of the European Central Bank’s governing council, suggesting uncertainty about whether the ECB would continue raising interest rates beyond its policy meeting scheduled for the following week.

Meanwhile, the yield on the two-year German government bond, which is sensitive to policy changes, fell by 0.07 percentage points to 3.1% on Wednesday. The yield on the regional benchmark 10-year bond also decreased by 0.05 percentage points to 2.29%. In contrast, Asian equities experienced a decline due to China’s sluggish economic recovery and the government’s slow implementation of stimulus measures, resulting in a 1.2% drop in the Hang Seng index and a 0.4% slip in China’s blue-chip CSI 300 index.

photo source: google

Delino Gayweh

Serrari Financial Analyst