European stocks gain after Federal Reserve raises interest rates

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European stocks rose on Thursday as investors bet that the previous day’s rate increase from the US Federal Reserve would probably be its last in the current cycle and looked ahead to the European Central Bank’s policy meeting later in the day.

Europe’s region-wide Stoxx 600 added 0.9 per cent, paring some of its losses from the previous session, while France’s Cac 40 gained 1.1 per cent and London’s FTSE 100 advanced 0.2 per cent.

Investors responded to the US central bank’s latest policy decision, which took the benchmark federal funds rate 0.25 percentage points higher to a target range of 5.25-5.5 per cent on Wednesday.

Traders are now pricing in an 80 per cent probability that policymakers will keep rates steady at their next meeting in September, according to data compiled by Refinitiv and based on interest rate derivatives prices.

But Fed chair Jay Powell refrained from issuing clear forward guidance, noting that the central bank’s rate path could be swayed by a series of inflation and jobs reports due before the next policy meeting.

In a statement following the decision, the Federal Open Market Committee said US inflation remained “elevated”, jobs gains had been “robust” in recent months and economic activity was growing “at a moderate pace”.

“This rate hike should mark the last in this cycle,” said Kerry Craig, global market strategist at JPMorgan Asset Management. “[But] unless the economic outlook deteriorates sharply, any view on rate cuts should be firmly pushed into 2024.”

Futures contracts tracking Wall Street’s benchmark S&P 500 added 0.3 per cent, while those tracking the tech-focused Nasdaq Composite gained 0.7 per cent ahead of the New York open.

Investors turned their attention to the European Central Bank, which is widely expected to lift its benchmark deposit rate by 0.25 percentage points to 3.75 per cent when policymakers meet later in the day.

Markets were mixed in Asia, where Hong Kong’s benchmark Hang Seng index rose 1.5 per cent, while the CSI 300 index of Shanghai- and Shenzhen-listed stocks slipped 0.1 per cent. 

In currency markets, Japan’s yen rose 0.5 per cent to 139.61 per dollar ahead of the Bank of Japan’s interest rate announcement on Friday.

The currency has strengthened 3.4 per cent against the greenback this month on bets from currency and bond traders that the BoJ could soon begin to pivot away from its ultra-loose monetary policy.

“More and more market participants are anticipating policy revisions,” said Katsutoshi Inadome, senior strategist at Sumitomo Mitsui Trust. “So if the BoJ decides to maintain the status quo as most expect, the yen should weaken against the dollar.”