European stocks surge, dollar gains as Fed decision looms

By Herbert Lash and Alun John

NEW YORK/LONDON (Reuters) -European shares surged to their highest since January 2022 and bond yields on both sides of the Atlantic eased on Monday even as markets scaled back what investors deemed had been overly ambitious bets on policy rate reductions at the end of 2023.

Stocks on Wall Street were little changed and the U.S. dollar advanced at the start of a packed week of big corporate earnings, European inflation data, Federal Reserve and Bank of England policy meetings and U.S. jobs numbers for January.

Europe’s broad STOXX 600 index briefly touched a fresh two-year high and traded slightly higher on the day after its biggest weekly gain in over two months last week. [.EU]

The dollar rose and the euro sank to almost a seven-week low, breaking below the 1.08 mark, as the market dialled back expectations of the extent of rate cuts this year by the Fed and European Central Bank (ECB), said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York.

“We’re still reacting and correcting to what happened in Q4 last year,” Chandler said.

“The market got in its head there’d be aggressive rate cuts not just by the Fed, but by the Bank of England and the ECB. The dollar sold off in that environment,” he said.

The dollar index rose 0.164%, while the euro was down 0.44% at $1.0804 after touching $1.0797. The euro may be poised for a weak February, as in the past seven years the single currency has declined versus the dollar during the month, Chandler said.

MSCI’s U.S.-centric gauge of global equity performance gained 0.17%, pulled higher by advancing shares in Europe. The pan-regional STOXX 600 index rose 0.16%.

Megacap earnings will be scrutinized after disappointing forecasts from Intel and Tesla last week deepened concerns about over-valuation of the momentum stocks that spearheaded the market rally at the end of 2023.

On Wall Street, the Dow Jones Industrial Average rose 0.04%, the S&P 500 gained 0.11% and the Nasdaq Composite added 0.26%. The S&P 500 has notched five all-time closing highs so far in January. Microsoft, which through its partnership with Open AI piqued market interest about artificial intelligence in 2023, is expected to report a 15.8% jump in quarterly revenue on Tuesday. The stock was up 0.6% in early trading.

Results from other members of the Magnificent Seven – Alphabet, Apple, Meta Platforms and Amazon.com – also are due this week, in addition to heavyweights Exxon Mobil, Chevron, Qualcomm, Merck, Pfizer and Boeing.

Investors await the press conference with Fed Chair Jerome Powell and the statement by the U.S. central bank at the conclusion of a two-day policy meeting on Wednesday, and the U.S. unemployment report on Friday.

Policymakers are expected to hold the Fed’s target interest rate steady at a range of 5.25%-5.50%, but some investors believe the U.S. central bank could drop its hiking bias.

“There is scope for U.S. rate cut expectations to bounce around this week,” said Jane Foley, head of FX strategy at Rabobank.

“Many economists warned last time around that Powell would push back against market expectations of rate cuts, and he chose not to, so we will have to see what he does.”

The yield on the benchmark 10-year Treasury note fell 5.9 basis points to 4.101%, while the European benchmark – the 10 year German bund – slid 0.4 basis points to 2.234%.

Treasury yields dropped sharply in November and December, helping equity markets to rally on expectations that Fed rate cuts could come as soon as March. But yields have risen this year as traders pared back rate cut bets.

Asian shares rose as new steps by Beijing to stabilize the local market outweighed the drag on sentiment from a Hong Kong court order to liquidate property giant China Evergrande.

Investors were also sensitive to geopolitical risks with oil rising after a Houthi missile attack caused a fire on a fuel tanker in the Red Sea and a drone attack killed three U.S. troops in Jordan.

In Asia, the main drag to stocks came from a Hong Kong court order to liquidate Evergrande, the poster child of China’s property meltdown.

Hong Kong’s Hang Seng trimmed gains on the news and closed up 0.78%, having earlier been up nearly 2% on the back of China’s securities regulator saying on Sunday it would fully suspend the lending of restricted shares.

Mainland Chinese blue chips had struggled to make headway early in the session, and eventually slumped 0.9%.

Oil prices dipped in choppy trade as China’s ailing property sector sparked demand worries, while rising tensions over the weekend in the Middle East intensified oil supply concerns.

U.S. crude futures fell 1.28% to $77.01 per barrel and Brent was at $82.61, down 1.13% on the day.

Spot gold added 0.4% to $2,027.08 an ounce.

(Reporting by Kevin Buckland; Additional reporting by Stella Qiu; Editing by Kylie MacLellan and Mark Potter)