European stocks advanced as US inflation cooled more than expected, reducing the possibility of further rate hikes by the Federal Reserve. Semiconductor-related shares jumped on bets on an improving earnings outlook spurred by the buzz around artificial intelligence.
The Stoxx 600 Index was up 1.2% by 1:40 p.m. in London, with technology and mining stocks leading the gains. Travel and leisure and health care sectors underperformed. ASML Holding NV and other chip-related stocks rallied as Jefferies analysts said the sector had embarked on a new AI-fueled upcycle after more than a year in the doldrums.
Latest figures showed US inflation decelerated last month to the slowest pace in more than two years, indicating more success for a Fed that’s been bearing down on price pressures.
“This is starting to be convincing in terms of inflation deceleration,” said Arnaud Girod, head of economics and cross-asset strategy at Kepler Cheuvreux. “I think that the expectation of a 25 basis-point-hike in November can de dumped. This is putting risk-free rates under pressure. We’re getting close to the pivot.”
After posting its biggest decline since March last week, Europe’s benchmark index is attempting a recovery as investors also weigh early corporate earnings reports. JD Wetherspoon Plc climbed after the UK pub operator’s trading update, with Goodbody noting that the outlook for fiscal 2024 seems better than expected. About You Holding SE soared by the most on record as it reaffirmed its revenue forecast for the full year.
Equity markets are already displaying a degree of calm that reflects investor optimism that inflation is now broadly under control — at odds to the stress seen in bond markets. Still, the outlook for further gains remains clouded after a strong first-half rally, strategists say.
“The fact remains that monetary policy is tightening everywhere, those full effects are still far from being felt and yet multiples have been expanding – which makes very little sense indeed,” said James Athey, investment director at Abrdn. “Longer term, there isn’t anywhere for risky assets to hide. Earnings are likely to fall and the discount rate is likely to remain relatively high. That means neither profits nor multiples should save the market from a ready reckoning.”
Barclays Plc strategist Emmanuel Cau said the second-quarter earnings season is expected to be mixed. Still, “so long as earnings and guidance don’t disappoint much, we think stocks can continue to grind higher through the summer,” he wrote in a note.
SECTORS IN FOCUS:
- European mining stocks after iron ore and industrial metals rose after new loans in China accelerated, adding to signs the nation’s post-pandemic recovery may finally be gaining traction as optimism increases that fresh liquidity is bolstering the construction sector.
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--With assistance from Michael Msika.