European stocks rose and futures pointed to gains on Wall Street on Tuesday, as investor sentiment showed signs of tentative recovery following a sharp equity sell-off yesterday.
US stock futures indicated investors looked for a more optimistic start after fears over a slowing economy pushed benchmark indices to their lowest level since December 2020. The S&P 500 was set to gain 1.2 per cent while the technology-heavy Nasdaq index looked set to rise 1.3 per cent.
That helped support trading in Europe. The regionwide Stoxx 600 was up 0.7 per cent at lunchtime while Germany’s Dax increased 0.7 per cent. The UK’s FTSE 100 traded flat in London.
Overnight, Goldman Sachs cut its European stock forecasts, citing that peak inflation and interest rates are yet to come in the region.
UK debt markets faced a second day of scrutiny as investors continued to react to the government’s controversial package of tax cuts. The yield on 10-year gilts rose 0.02 percentage points to 4.13 per cent while the yield on two-year gilts was down 0.2 percentage points to 4.31 per cent. The moves come after a brutal Monday of selling which saw the UK’s 10-year gilt yield rising by its most in 40 years, according to Refinitiv data.
The Bank of England and Treasury later sought to calm markets.
“UK rates will no doubt remain in the driving seat today,” ING analysts said. “The BoE’s statement released late in yesterday’s session didn’t seem to calm expectations of an emergency inter-meeting hike but markets had only 30 minutes to react before the close.”
Italian bond yields rose for the second consecutive day after a coalition of far-right politicians won Italy’s elections. The yield on Rome’s 10-year bonds rose as high as 4.53 per cent, its highest level since 2013.
The closely watched difference between Italian and German 10-year yields hit 254 basis points, the highest level since April 2020. It then fell back below 250 basis points, which is considered an important mark by investors. The widening difference underscores investor jitters about the success of far-right parties in Italy’s elections and their willingness to stick to EU rules.
“The market expects that even a rightwing government cannot afford to throw out the current recovery and resilience plan that underpins Italy’s access to the very substantial Next Generation EU funds,” said Andrew Mulliner, head of global aggregate strategies at Janus Henderson. “That assumption may well be tested . . . and with it the spread between Italian and German government bond yields.”
Sterling traded higher after touching an all-time low against the dollar yesterday. The pound gained 1 per cent against the dollar at $1.078 and rose 0.9 per cent against the euro, to reach €1.122.
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