European shares traded higher on the final trading week of August, as traders weighed the prospect of higher interest rates from the U.S. Federal Reserve and looked ahead to upcoming economic data later in the week.
Germany’s DAX 30 rose 59 points, or 0.4%, France’s CAC 40 climbed 40 points, or 0.6%, and the Italian FTSE MIB gained 200 points, or 0.7%.
Markets are closed in the U.K. for a public holiday.
Market participants continue to reflect on a roundup of commentary from the Kansas City Federal Reserve’s annual retreat in Jackson Hole, Wyoming, last week. At the gathering, a slew of central bankers met to discuss monetary policy and how to address stubbornly high inflation in many major economies.
The most closely watched speech of the event came from Fed Chair Jerome Powell. The U.S. central bank head said that inflation remains too high and that the Fed is ready to continue hiking interest rates to tame persistently high prices.
While Powell said the Fed could be flexible, he added it still has further to go to fight inflation.
“Although inflation has moved down from its peak — a welcome development — it remains too high,” Powell said in prepared remarks at Jackson Hole.
“We are prepared to raise rates further if appropriate, and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective.”
With inflation steadily decreasing — but still above target — in many major economies, attention is increasingly turning to how central bankers will respond to a deteriorating growth outlook.
Bad news for stocks?
A recent surge took 10-year yields to their highest level since November 2007 last week, as investors grappled with a surprisingly resilient U.S. economy and the possibility that sticky inflation could force the central bank to keep interest rates higher for longer.
Higher interest rates are typically bad news for stocks as equity investors become reluctant to bid up stock prices because the value of future earnings looks less attractive versus bonds that pay more competitive yields. Bond yields move inversely to prices.
Willem Sels, global chief investment officer at HSBC Private Banking and Wealth, said the yield on the 10-year Treasury bond represented an attractive entry point for debt investors — and he doesn’t see it causing a sell-off in the S&P 500 or other major benchmarks yet.
“It’s an entry point … for the bond market in part because it is the real yield that has moved,” Sels told CNBC’s “Squawk Box Europe.“
“The breakevens are basically flat, so what the market is pricing is indeed that the central bank is committed to keeping those rates higher and crushing that inflation. So, they are credible, which is a good thing,” Sels said.
“I do think that ultimately it feeds through into credit market and then into financial conditions but with a bigger lag and with a particular high yield is still a market that needs to widen out. People keep talking about this maturity wall, which is very low at this point in time, but ultimately it will come.”
“I do think that that then would have an effect on the equity market. For now, though, equity markets are still supported by the cyclicals in the U.S.”
Other developments
In Asia-Pacific, stocks began the week higher, with mainland Chinese and Hong Kong stocks leading gains in the region.
The main event driving the rally in Asia was a stock market policy change from the government. China’s Ministry of Finance on Monday cut the stamp duty on stock trades by half in an effort to boost investment in its stock market. It came after China’s CSI 300 index fell to a nine-month low.
Still, concerns linger among economists over structural issues in China’s economy, such as debt, demographics, and Beijing’s deteriorating relationship with the West.
Within the Chinese market, shares of the world’s most indebted property developer, China Evergrande Group, tumbled 87% as trade resumed after 17 months.
Back in Europe, developments are quiet on the corporate front as the region has wrapped up a busy earnings season.
Swiss bank Credit Suisse, which is now a subsidiary of UBS after a government-facilitated takeover, posted a 3.5 billion Swiss franc ($4 billion) loss, according to a report in the SonntagsZeitung citing insiders at the bank.
Later in the week, the U.S. Labor Department is set to release nonfarm payrolls showing the pace of jobs and wage growth, which could guide the Fed on how to proceed with its monetary policy.
