European shares kicked off the last trading week of August by pushing higher, as investors weighed the probability of higher interest rates from the Federal Reserve and mulled over economic numbers which will be out later in the week. Germany's DAX 30 increased by 125 points at opening, corresponding to 0.8%, the CAC 40 in France advanced 69 points, or 0.9%, and Italy's FTSE MIB rose 207 points, corresponding to 0.7%. Market activity in the U.K. was curtailed due to a public holiday.
The commentary given by Fed Chair Jerome Powell at the Kansas City Federal Reserve's annual retreat in Jackson Hole, Wyoming, was of particular interest. Several central bankers came together to deliberate monetary policy and find a solution to the consistent inflation levels in many major economies. Powell pinpointed that inflation was still too high and the Fed was ready to raise interest rates to curb it. Maintaining a restrictive policy environment until there is assurance that inflation is heading towards the objectives of the bank was a part of the message too.
Now that inflation is lowering in numerous major economies, the spotlight is gradually shifting to how central bankers will handle a declining growth outlook.
Last week saw the 10-year yield climb to its highest level since November 2007 as traders grappled with a stronger-than-expected U.S. economy as well as the possibility that inflation could keep interest rates at a higher level for an extended time. Generally, higher interest rates are seen as a negative for the stock market as prospective equity investors become more reticent to bid up prices because the value of future earnings appears less attractive in comparison to bonds that offer competitive rates. Willem Sels, global head of investment at HSBC Private Banking and Wealth, noted the 10-year Treasury bond yield was seen as a reasonable entry point for bond investors, and he does not think it will result in an S&P 500 sell-off or any other major benchmarks yet.
Sels stated that the yield is presently reflective of the commitment of the central bank to fight inflation, making it very credible. He added that although the present maturity wall is low, eventually it will broaden out. Furthermore, Sels indicated there may eventually be an effect on the stock market, but right now equity markets are still supported by the cyclicals in the U.S.
Stocks in the Asia-Pacific region rose from the start of the week, with those in mainland China and Hong Kong heading the gains. This occurred despite worries over underlying economic issues in China such as debt, population aging, and the worsening relationship with the West. Shares of China Evergrande Group, the world's most indebted development firm, dropped 87% as trading resumed after 17 months.Over in Europe, the earnings period is finished, and Credit Suisse posted a 3.5 billion Swiss franc ($4 billion) loss – per SonntagsZeitung sources – following its acquisition by UBS. Later in the week, the U.S. Labor Department will reveal nonfarm payrolls figures, which could inform the Federal Reserve on the next steps taken with its monetary policy.
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