UK pound and government bond yields slip after gloomy BoE forecast

European equities rose cautiously on Thursday as investors balanced positive US corporate earnings with a wave of monetary tightening by central banks.

The regional Stoxx 600 share index added 0.3 per cent in morning trading, lifted by technology stocks after Wall Street’s tech-heavy Nasdaq Composite equity gauge rose to its highest level in three months on Wednesday. Germany’s Xetra Dax gained 0.9 per cent and the FTSE 100 in London shed 0.2 per cent.

The Wall Street rally was driven by better than expected quarterly earnings from PayPal, adding fuel to a recent equity market rebound led by the tech sector that followed the worst first half of the year for US stocks for at least half a decade.

But with annual rates of inflation running at above 9 per cent in both the UK and the US, central bankers on both sides of the Atlantic have expressed determination to raise borrowing costs to reduce demand.

The Bank of England is widely expected to lift its main interest rate by as much as 0.5 percentage points to 1.75 per cent later on Thursday, in what could be its largest rate rise for more than 25 years.

In the US on Wednesday, meanwhile, several Federal Reserve officials moved to dismiss recent market speculation that the central bank would start cutting rates early next year in response to an economic slowdown.

“I think to a large extent this is a bear market rally,” said Willem Sels, global chief investment officer at HSBC’s private bank.

Markets were “incorporating a view that inflation will quickly come down and there will be a big pivot by central banks,” he added, while labelling this optimism as “premature”.

St Louis Fed president James Bullard told CNBC on Wednesday that US interest rates would “probably have to be higher for longer” to reduce inflation from 40-year highs. In a separate appearance, Minneapolis Fed president Neel Kashkari said US rate cuts in 2023 were extremely unlikely.

“The Fed rates message should be clear, but the market isn’t buying [it],” Rabobank strategist Michael Every said.

“I expect market returns to be lacklustre from here,” added Mikhail Zverev, portfolio manager at Amati Global Investors.

“Inflationary pressure has not abated yet and will persist,” he said, “and in terms of company valuations, the interest rate environment will remain unsupportive.”

The two-year US Treasury yield, which tracks monetary policy expectations, was steady at just under 3.1 per cent on Thursday morning, having approached 3.5 per cent in mid June.

The 10-year Treasury yield, which underpins company borrowing costs and mortgage rates, moderated by 0.02 percentage points to 2.74 per cent. Bond yields fall as prices rise.

Futures contracts on Wall Street’s S&P 500 share index traded flat, as did those tracking the 100 largest stocks on the Nasdaq.

In Asia on Wednesday, Hong Kong’s Hang Seng share index rose 1.9 per cent, led by tech stocks and as markets looked through heightened tensions between China and Taiwan. China’s CSI 300 stock index added 0.9 per cent and Tokyo’s Nikkei 225 closed 0.7 per cent higher.

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