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European stocks rise after S&P closes at highest level in more than a year

European stocks rose on Tuesday, propelled by the S&P’s highest close in more than a year, as traders prepared for the release of US inflation data and the Federal Reserve’s decision on interest rates. 

Europe’s region-wide Stoxx 600 climbed 0.2 per cent, while France’s Cac 40 added 0.4 per cent and Germany’s Dax advanced 0.3 per cent.

Investors took their cue from a rally on Wall Street, after the benchmark S&P 500 rose 0.9 per cent in the previous session, reaching its highest point since last April. The tech-heavy Nasdaq Composite added 1.5 per cent to its highest level in 14 months.

The latest US consumer price index report, due later on Tuesday, is expected to show that headline inflation slowed to 4.1 per cent year on year in May, according to economists surveyed by Reuters. 

The figure would mark a sharp decline from 4.9 per cent in April, following 5 per cent in March, in a sign that the Fed’s tightening campaign was beginning to take effect, offering policymakers an opportunity to pause.

The majority of investors bet that the Fed will resist raising interest rates when it meets on Tuesday and Wednesday, marking the first pause in the central bank’s 14-month campaign to bring down inflation. 

“The consensus view is that inflation is on a path lower, the economy is slowing but not contracting, and the Fed will chill and reassess in July,” said Mike Zigmont, head of research and trading at Harvest Volatility.

US futures were up, with contracts tracking the S&P 500 rising 0.3 per cent while those tracking the Nasdaq 100 added 0.6 per cent ahead of the New York open. 

The yield on the US two-year Treasury, which is more sensitive to monetary policy expectations, slipped 0.02 percentage points to 4.57 per cent, while the yield on the 10-year note was down 0.03 percentage points at 3.73 per cent. Bond yields fall as prices rise.

The dollar, which strengthens when investors expect higher rates, lost 0.4 per cent against a basket of six peer currencies.

Traders also took heart after the ZEW Institute’s economic sentiment index for Germany came in at minus 8.5 in June, improving from minus 10.7 in the previous month, and landing well above the consensus forecast of minus 13.1. 

Economists are still confident that the European Central Bank will raise its deposit rate by another quarter-percentage point when policymakers meet on Thursday.

In the UK, strong wage data pushed short-term gilt yields above the level reached during the turmoil following Liz Truss’s “mini” Budget last autumn, raising the likelihood that the Bank of England will increase rates further.

“With all signs suggesting that inflationary pressures are failing to ease, and may well be rebuilding against the BoE’s expectations, the [labour market] data will send shockwaves through Threadneedle Street,” said Nick Rees, FX market analyst at Monex Europe.

The yield on the two-year gilt rose 0.18 percentage point to 4.81 per cent, compared with the peak of 4.64 per cent in late September.

Asian equities rose on Tuesday, with Chinese stocks advancing after the People’s Bank of China reduced its seven-day reverse repurchase rate by 0.1 percentage point in an effort to boost short-term liquidity.

Hong Kong’s Hang Seng index rose 0.6 per cent and China’s CSI 300 was 0.5 per cent higher. Japan’s Topix added 1.2 per cent and South Korea’s Kospi gained 0.3 per cent.

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