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European markets turn higher as Spanish inflation drops

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European stocks and US futures rose on Thursday as investors cheered news of falling Spanish inflation, adding to upbeat news from the retail and banking sectors.

The pan-European Stoxx 600 rose 0.3 per cent, lifted by gains in the consumer cyclicals sector, while the Cac 40 added 0.9 per cent and Germany’s Dax gained 0.2 per cent.

European benchmarks moved higher mid-morning after Spanish inflation fell to 1.6 per cent year on year in June, making it the first of the eurozone’s large economies to record annual price rises below the European Central Bank’s 2 per cent target since the Ukraine war.

The move eased market worries over the future path of global interest rates, after a host of central bankers at an annual European Central Bank meeting in Portugal indicated that more action might be needed to ease rapid price growth, despite fears of monetary policy tightening inducing an economic slowdown.

Underscoring the trend, the Swedish central bank on Thursday raised its rate by a quarter percentage point to 3.75 per cent as expected.

Investors turned to retail-focused stocks. Shares of H&M jumped 15 per cent after the Sweden-based fashion retailer said its second-quarter profits beat estimates, even as inflation and high borrowing costs hit consumers this year.

Meanwhile, contracts tracking Wall Street’s benchmark S&P 500 rose 0.3 per cent and those tracking the tech-focused Nasdaq 100 added 0.4 per cent ahead of the New York open.

Investors welcomed the news that big US banks passed the Federal Reserve’s annual stress test, proving they have enough capital to withstand a sharp economic downturn.

Bank of America rose 1.4 per cent in pre-market trading, while Wells Fargo added 1.9 per cent and JPMorgan Chase gained 0.8 per cent.

In Portugal Federal Reserve chair Jay Powell repeated that US interest rates would probably go higher, and did not rule out the possibility of two consecutive rises. 

Investors were unmoved by German inflation data, which showed that the rate of price growth in the eurozone’s largest economy rose to 6.8 per cent in June on an EU harmonised basis, slightly higher than the 6.7 per cent predicted by a consensus of economists polled by Reuters.

The eurozone-wide data published on Friday is expected to show that headline inflation slowed, but the closely watched core figure, which excludes volatile food and energy prices, edged up in a sign that the ECB’s tightening campaign could extend for longer. 

“Today’s first inflation releases for June from the eurozone will probably confirm what central bankers have been stressing all the while: their job is not done,” said Antoine Bouvet, head of European rates strategy at ING.

In government bond markets, the yield on the policy-sensitive two-year Treasury added 0.04 percentage points to 4.76 per cent, while the yield on the benchmark 10-year note gained 0.04 percentage points to 3.75 per cent. Bond yields rise as prices fall. 

In Asia, equities edged lower, with Hong Kong’s Hang Seng index falling 1.3 per cent, while China’s CSI 300 lost 0.5 per cent and Japan’s Topix lost 0.1 per cent.

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