European equities and Wall Street stock market futures made small gains as investors balanced the prospect of trillions of dollars in additional US stimulus with concerns over rising inflation.
The region-wide Stoxx Europe 600 index rose 0.5 per cent, adding to the all-time high hit a day earlier. London’s FTSE 100 climbed 0.3 per cent while futures markets signalled that Wall Street’s S&P 500 would gain 0.4 per cent in early New York dealings.
The Stoxx 600 has traded within a narrow range for weeks, failing to move decisively higher, despite growing optimism about Europe’s Covid-19 vaccine rollout and the region’s improving reopening timelines.
President Joe Biden will later on Friday lay out a $6tn annual budget proposal incorporating large-scale infrastructure and social investment programmes.
Inflation data on Friday are also expected to show that core personal consumption expenditure — the Federal Reserve’s preferred measure of inflation that excludes volatile food and energy costs — hit 2.9 per cent in April from the same month last year, its highest reading since 1993.
A higher than expected inflation reading may pressure the Fed, the world’s most influential central bank, to rethink its ultra-loose monetary policies that have boosted markets throughout the pandemic.
“Supply-chain bottlenecks and shortages in manufacturing seem to be more widespread and durable than initially anticipated,” said Thomas Costerg, senior US economist at Pictet Wealth Management. “Pressure could rise on the Fed to start sending signals about slowing its $120bn-per-month asset purchases.”
Government bonds were steady on Friday. The yield on the 10-year US Treasury bond, which moves inversely to its price, was unchanged at 1.61 per cent. Germany’s equivalent Bund yield was flat at minus 0.171 per cent.
Bank shares led the Stoxx as investors put money into cyclical sectors that are expected to perform better in an environment of faster economic growth and rising market interest rates set by bond yields.
“European equities typically outperform when bond yields rise, as they have comparatively high exposure to groups and sectors that are beneficiaries of rising yields, such as banks, industrials, consumer discretionary, and materials,” said Frédérique Carrier, RBC wealth management’s head of investment strategy.
“They have relatively lower exposure to technology and communication services, sectors that tend to underperform in that environment.”
In currencies, the euro was steady against the dollar, purchasing $1.2184. Sterling also dipped 0.1 per cent to $1.4182. The dollar index, which measures the greenback against major currencies, added 0.1 per cent.
Brent crude, the global oil benchmark, was 0.3 per cent higher at $69.65 a barrel.
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