European stocks hit their highest level in three months on Thursday after a better than expected report on German business confidence boosted investors’ hopes of a milder slowdown in the region’s largest economy.
The regional Stoxx Europe 600 added 0.5 per cent, extending a run that has seen the benchmark index rise more than 9 per cent in the last month. London’s FTSE 100 finished flat. US markets were closed for Thanksgiving holiday.
Germany’s Dax added 0.8 per cent after the latest Ifo Institute index showed confidence among 9,000 companies rose to 86.3 in November from 84.5 in October, ahead of a poll by Reuters that forecast a reading of 85.
“Markets are now pricing with a lag a recession in Germany, right when the data are pointing to a rosier scenario,” said Agnès Belaisch, chief European strategist at the Barings Investment Institute.
“This makes the work of the European Central Bank so much more delicate,” Belaisch added. “It has to keep tightening financing conditions to guide inflation expectations and wage settlements downward, right when the economy shows some signs of a nascent recovery from a tough shock.”
Traders shrugged off news that the difference between the yield on two-year German government debt and 10-year had reached its widest level since 1993.
Long-term debt typically yields more than short-term debt to compensate investors for the risk that inflation eats into their returns. So-called yield curve “inversions”, when the opposite is true, typically precede recessions.
Germany’s yield curve inverted for the first time in 29 years in early November, though the difference between the two yields narrowed marginally on Thursday. The two-year yield fell 0.03 percentage points to 2.11 per cent and the 10-year yield dropped 0.07 percentage points to 1.85 per cent. Yields fall as prices rise.
Equity investors were also boosted by overnight gains on Wall Street, after minutes from the Fed’s November meeting revealed that officials believed their policy to aggressively tighten interest rates had begun to bear fruit in the fight against inflation.
“Financial conditions had tightened significantly in response to the Committee’s policy actions, and their effects were clearly evident in the most interest rate-sensitive sectors of the economy,” the minutes showed.
The central bank has raised interest rates by 0.75 per cent four times in a row. The Fed was “primed, ready, anxious, to slow the pace of hiking because they still believe they can slow inflation without creating a recession and increasing unemployment,” said Steven Blitz, chief US economist at TS Lombard, who nonetheless expected a 0.75 percentage point rise in December. The Fed “will rue the day if they don’t,” he added.
In Asia, Hong Kong’s Hang Seng index rose 0.8 per cent and Japan’s Topix added 1.2 per cent.