European shares rally, eyeing ECB rates move

WASHINGTON: European stocks bounced and government bond yields dropped on Monday as investors looked forward to an interest rate cut from the European Central Bank (ECB), while U.S. jobs data kept the focus squarely on inflation.

The pan-European STOXX index (.STOXX), opens new tab was up 0.6% by 0850 GMT, while U.S. stock futures , also rose.

In bond markets, the U.S. 10-year Treasury yield was down 4 basis points to 4.47% and German yields, which touched six-month highs last week, also dropped.

All focus was on the ECB, which is considered almost certain to trim rates by a quarter point to 3.75% on Thursday, which would make it the first major central bank to cut rates this cycle.

However a surprisingly high reading for euro zone inflation, out last week, further weakened the case for a rapid round of reductions. Markets now price in fewer than 60 basis points of easing now - meaning two 25-basis point cuts and less than a 50% chance of a third.

"There's a relatively positive risk tone to start the week, which seems like a continuation of the positive momentum seen on Friday, albeit is somewhat surprising given the bumper calendar of event risk coming up," said Michael Brown, strategist at broker Pepperstone in London.

China's factory activity grew at the fastest pace in about two years in May, data showed on Monday. That extended the optimism prevailing in markets following Friday figures showing the U.S. Federal Reserve's preferred measure of inflation held steady in April.

"The ECB decision is perhaps the most important event to watch, particularly after last week’s inflation data which raises the hawkish risk that there is only one more cut this year after a 25bp reduction on Thursday," Brown added.

Markets also imply around an 80% chance the Bank of Canada will cut at its meeting on Wednesday and around 60 basis points of easing this year, though analysts are hopeful the easing will be even deeper.

Investors are a lot less dovish on the Fed, seeing little prospect of a move until September, though the odds of a move then increased after Friday's inflation data. They price in only a 50% chance of a second cut by December.

The outlook could change this week given data due includes key surveys on services and manufacturing, and the May payrolls report in which unemployment is seen holding at 3.9% as 190,000 net new jobs are created.

In Europe, focus was also on a downgrade to France's credit rating by Standard & Poor's, but the country's bonds showed little reaction .

ASIAN STRENGTH

Currency markets saw the U.S. dollar start June higher, rising 0.1% against a basket of peers after it posted its first monthly decline of 2024 in May.

The euro was a touch lower against the dollar at $1.0838.

The yen , this year's worst performing G10 currency hurt by low Bank of Japan interest rates, edged higher against the dollar at 157.040, but was close to last week's four-week low of 157.715.

Emerging markets were in focus, with India's rupee strengthening and the Mexican peso weakening following exit poll results from general elections in both countries.

Asian stocks (.MIAPJ0000PUS), opens new tab, (.N225), opens new tab rose on the back of the strong Chinese data, along with prints from Japan and South Korea, while Indian stocks (.NSEI), opens new tab hit record highs.

Gold was steady at $2,327 an ounce , having now rallied for four months in a row helped in part by buying from central banks and China.

Oil prices see-sawed after OPEC+ agreed on Sunday to extend most of its oil output cuts into 2025, though some cuts will start to be unwound from October 2024 onwards.

Brent was last up 0.3% to $81.35 a barrel, while U.S. crude was up similarly to $77.21 per barrel.

($1 = 157.1900 yen)