European stocks rally as investors take heart from Jay Powell comments

European stocks rallied on Wednesday morning after investors grew optimistic that the US Federal Reserve would not need to raise its benchmark interest rate more than expected.

Equities in Europe followed late gains overnight in the US after remarks from the US central bank’s chair Jay Powell that were less hawkish than some traders had anticipated.

Powell was responding to Friday’s job’s report, which showed higher growth than economists had forecast and had led to a sell-off in US stocks and bonds. US markets reacted to his comments, with the S&P 500 closing 1.3 per cent higher.

The European benchmark Stoxx 600 was up 0.9 per cent and Germany’s Dax was 0.7 per cent higher. The FTSE 100 gained 0.8 per cent to hit a record intraday high.

However US futures lost ground, with contracts tracking the blue-chip S&P 500 down 0.3 per cent and the tech-heavy Nasdaq off 0.2 per cent in pre-market trading.

“Europe has a natural correlation with the United States, so when sentiment there improves it drives sentiment across European markets,” said Mobeen Tahir, director of macroeconomic research and tactical solutions at WisdomTree Europe. “Our assessment is that stock markets are starting to realise that policy tightening is not necessarily crippling the economy. Markets are learning to live with higher rates, a profound change from last year.”

The dollar index, a measure of the US currency’s strength against a basket of six peers, fell 0.3 per cent. The euro strengthened against the greenback, up 0.2 per cent to $1.07.

Yields on 10-year German government bonds rose 0.04 percentage points to 2.34 per cent and 0.03 percentage points on the 10-year French equivalent to 2.79 per cent. Separately, the European Central Bank said it would cut the maximum rate it paid on government deposits to encourage investors to put their money in the market.

At The Economic Club in Washington, DC, Powell stressed the need for further rate rises to cool the economy. Addressing the jobs data, he said it “shows you why we think this will be a process that takes a significant period of time . . . the labour market is extraordinarily strong”.

“The process has a long way to go and further interest rate increases will probably be needed,” said Toby Sturgeon, Global Head of Fiduciary Investment Services at Zedra, a wealth planning company. “With so much volatility in all markets, we will watch closely the changes in the coming weeks.”

In Asia, the Hang Seng index was closed flat, down less than 0.1 per cent, while the Chinese CSI 300 fell 0.4 per cent.

On commodities markets Brent crude, the international benchmark, rose 0.9 per cent while its US counterpart, WTI, was 0.8 per cent higher.