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European stocks rallied on Friday after lower than expected eurozone inflation data gave investors hope that interest rates in the bloc would soon hit their peak.
The pan-European Stoxx 600 added 0.8 per cent, extending early-morning gains, while France’s Cac 40 rose 0.9 per cent and Germany’s Dax advanced 1.1 per cent.
US futures also pointed to gains as the end of the first half of the year approached. Contracts tracking Wall Street’s benchmark S&P 500 added 0.3 per cent and those tracking the tech-focused Nasdaq 100 gained 0.5 per cent ahead of the New York open.
The Nasdaq is on course to record its third best-ever first half, according to data from Bespoke Investment Group, as investors loaded up on artificial intelligence-related stocks.
The gains in Europe were fuelled by the latest report on eurozone inflation, which eased more than economists had expected. The annual rate of price growth slowed to 5.5 per cent in June, from 6.1 per cent in the previous month, landing 0.1 percentage points below analyst expectations.
The closely watched measure of core inflation, which strips out volatile food and energy prices, was also 0.1 percentage points less than forecast, at 5.4 per cent. Together the moves raised hopes that the European Central Bank could halt its policy of raising rates aggressively to damp inflation sooner than expected.
Derivatives markets adjusted their ECB policy predictions, overwhelmingly betting on a quarter-point rate increase in July, and lowering the likelihood of a larger half-point rise. The central bank had last raised its benchmark deposit rate to 3.5 per cent in June.
European blue-chip indices have made gains in the first half of the year, as investors expected that inflation would slow and the ECB’s historic tightening campaign would peak.
London’s FTSE 100, which has trailed other benchmarks in Europe this year, rose 0.7 per cent.
The yield on US government debt ticked up in the previous session, after surprisingly strong data boosted expectations that the Federal Reserve would need to raise interest rates further to tame inflation.
Yields on the policy-sensitive two-year Treasuries rose 0.05 percentage points to 4.92 per cent on Friday, their highest level since the start of March, while those on the benchmark 10-year notes edged up 0.03 percentage points to 3.88 per cent. Bond yields rise as prices fall.
“Yesterday has highlighted the degree to which the credibility of the Fed’s higher-for-longer narrative hinges on the data. If activity refuses to lie down yields can only rise further,” said Padhraic Garvey, Americas regional head of research at ING.
Investors turned their attention to the US core personal consumption expenditure price index, coming out later on Friday, which is expected to have remained at 4.7 per cent in May, unchanged from the previous month.
China-related equities made moderate gains, with the CSI 300 index gaining 0.5 per cent and Hong Kong’s Hang Seng up 0.1 per cent.
Earlier in the day, China released official purchasing managers’ indices for June showing a contraction in factory activity and weaker than expected growth in services, bolstering calls for Beijing to enact further stimulus measures.
The renminbi added 0.2 per cent against the dollar, after briefly slipping to its weakest point since November.
“The softer momentum means more policy support is needed to reinvigorate the economy,” analysts at HSBC said.
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