European shares fluctuate as interest rate fears shadow markets

European stocks gave up early gains by Monday afternoon, as investors weighed the prospect that the world’s biggest central banks would keep interest rates higher for longer to curb inflation.

The region-wide Stoxx 600 rose 0.2 per cent, while France’s Cac 40 eased 0.1 per cent. Trading activity was more muted as US markets are closed for Presidents’ Day.

However, US futures tracking the blue-chip S&P 500 were down 0.2 and the technology-heavy Nasdaq was flat.

Investors have been forced in recent weeks to review their forecasts for the peak of interest rates in the US following several stronger than expected economic data reports.

The numbers indicated that the US economy had not fully felt the Federal Reserve’s year-long attempt to curb growth and bring down inflation through an aggressive campaign of rate increases. Sovereign debt prices have fallen and yields have risen in response to the data.

“There isn’t much on this week’s calendar that is set to stop the bond market sell-off that started with the January US jobs report,” said analysts at ING. “The main hope comes from the [Fed] minutes which might paint a less hawkish, if dated, picture than recent Fed speakers.”

Minutes from the January Fed meeting will be made public on Wednesday, which may offer clues on the US central bank’s criteria for slowing the pace of rate rises.

The dollar index, which measures the greenback against a basket of six peer currencies, was flat, while the euro was down 0.1 per cent against the greenback.

The Hang Seng index finished 0.8 per cent higher, while China’s CSI 300 gained 2.45 per cent — its best one-day performance since late November.

Analysts at Goldman Sachs said investors were cheered by stronger economic activity as China dropped its longstanding zero-Covid policy and provided more clarity on the listing of Chinese shares in the US.

However, the bank warned that confidence in China’s reopening was largely due to hedge funds pouring money into equities. Fund managers and owners are “somewhat hesitant to deploy fresh capital to work, notably investments with high liquidity risk premium and long capital commitment period, amid an uncertain US-China geopolitical environment”, it said.

In Europe yields on 10-year German Bunds fell 0.03 percentage points to 2.43 per cent as investors debated whether the European Central Bank would follow the Fed in raising rates. Isabel Schnabel, an ECB executive board member, told Bloomberg last week that she saw risks that markets would underestimate inflation.

Traders were also looking ahead to the latest IHS Market purchasing managers’ indices, private gauges of operating conditions in the manufacturing sector.

In Europe the Zew and Ifo surveys, which measure confidence in the German economy, will be released on Tuesday and Wednesday respectively, and UK and German consumer confidence numbers are published on Friday.

On commodities markets, Brent crude, the international benchmark, rose 1.5 per cent to $84.25 per barrel. The WTI index, its US counterpart, was up 1.5 per cent at $77.46 per barrel.