European stocks muted as traders weigh future monetary policy direction

European shares were muted on Wednesday, while government bonds steadied after a sell-off driven by expectations of central banks tightening monetary policy to curb inflation.

The regional Stoxx 600 share index traded flat, Germany’s Xetra Dax rose 0.1 per cent and London’s FTSE 100 added 0.3 per cent.

Elsewhere, a broad MSCI index of Asia Pacific shares excluding Japan added 1.1 per cent, following a rally on Wall Street in the previous session.

The moves came after gains in the previous session as investors revisited equity sectors that had been heavily affected by Russia’s invasion of Ukraine, having steered money out of US Treasuries that are suffering their worst month since Donald Trump was elected president in 2016.

“We believe depressed investor sentiment and improved clarity around the Federal Reserve outlook suggest near-term upside potential in equities,” strategists at Credit Suisse said in a note to clients.

“We continue to expect an attractive return outlook in the next three to six months, due to the constructive earnings picture and still above-trend global growth forecasts.”

Earlier this week, Fed chair Jay Powell said the central banked needed to move “expeditiously” towards tighter monetary policy after the annual pace of US inflation hit a fresh 40-year high of 7.9 per cent in February. In Germany, Bundesbank president Joachim Nagel said on Monday that the European Central Bank should raise interest rates this year if the inflation outlook warranted it.

The yield on the 10-year Treasury note, which moves inversely to its price and sets the tone for borrowing costs worldwide, added 0.01 percentage points on Wednesday morning to about 2.39 per cent, a level not seen since May 2019. Germany’s equivalent Bund yield was steady at about 0.51 per cent, its highest since October 2018.

European bank stocks, which on March 7 were more than a quarter below their level of February 23, the day before Russia launched its invasion of Ukraine, rose 0.2 per cent on Wednesday.

In Asia, tech groups traded in Hong Kong rose 2.1 per cent and the broader Hang Seng index added 1.2 per cent as investors took advantage of lower valuations. Chinese equities staged their worst weekly drop since 2008 earlier this month, before top economic official Liu He pledged state support for the economy and financial markets. The Hang Seng remains more than 5 per cent lower for the year.

The Japanese yen hit 121.4 per dollar, its latest six-year low, reflecting the Bank of Japan’s caution towards raising interest rates to battle a rare bout of inflation in the Asian nation, in contrast to the Fed’s hawkish policies.

In the UK, the pound and gilt yields were steady ahead of chancellor Rishi Sunak’s Spring Statement later in the day, in which he is expected to reveal that the nation’s deficit is at least £20bn smaller than previously anticipated but hold back on using all available funds to tackle a cost-of-living crisis.

Data released on Wednesday also showed the annual rate of UK inflation hit a fresh 30-year high of 6.2 per cent in February.