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European shares slide, euro steady as data tees up ECB rate hikes

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U.S. Dollar banknote is seen in this illustration taken July 17, 2022. REUTERS/Dado Ruvic/Illustration

The euro held at a nine-month high against the dollar, though European stocks eased after regional business activity data reinforced expectations that the European Central Bank (ECB) will raise rates by a further 50 basis points.

Euro zone business activity made a surprise return to growth in January, according to a survey – the latest sign that the downturn in the bloc may not be as deep as feared.

S&P Global’s flash Composite Purchasing Managers’ Index (PMI) climbed to 50.2 this month from 49.3 in December, the first time it has been above the 50 mark since June.

Britain’s flash Composite Purchasing Managers’ Index (PMI), however, dropped to 47.8 in January from 49.0 in December, the lowest since January 2021.

U.S. PMI data is due later in the day.

MSCI’s world index (.MIAPJ0000PUS) was steady, having touched a fresh seven-month high early on, after shares gained in the U.S. overnight, and parts of Asia earlier in the day.

Europe’s broad Stoxx 600 index (.STOXX) lost 0.4%, after the activity data, which analysts said suggests the ECB can continue to raise rates to curtail inflation, without fearing too much about damaging growth.

“For the ECB, this should seal the deal for a 50-basis point hike next week,” said ING economists in a note.

The MSCI world index is up about 7% since the start of this year, thanks to hopes central banks globally are nearing the end of their interest rate tightening programme, as well as optimism induced by economic data.

Britain’s FTSE 100 (.FTSE) was down 0.4%, underperforming the broader European market, and domestically-focused mid caps (.FTMC) gave up early gains after the PMI data to trade near flat.

Most markets in Asia were closed for Lunar New Year for a second day, but Japan’s Nikkei (.N225) closed at a more than one-month high, recovering all its losses since the Bank of Japan’s surprise policy tweak last month. Australian shares also rallied. (.AXJO)

“We’re still pretty Fed-focused right now, with the meeting coming up next week. The market is of the extremely optimistic view that there will be two rate cuts by the end of the year and I think that’s what’s keeping sentiment buoyed at the moment,” said Fiona Cincotta, an analyst at Cityindex.

“We’re watching U.S. PMIs today,” she added.

The Federal Reserve’s rate setting committee begins its two-day meeting on Feb. 1. Inflation has started to come down in recent months, and signs the U.S. economy is slowing could lead the Fed to start thinking about its next steps after a slew of rate hikes last year.

The day’s heavyweight on the corporate earnings front is Microsoft , which will report its earnings after market close.

Those hopes of a better economic outlook in Europe have also affected currency markets, and, along with suggestions the U.S. Federal Reserve is slowing rate hikes more quickly than the ECB, have continued to support the euro and other neighbouring currencies.

The European common currency was steady at $1.0865, just off its nine-month high of $1.0927 hit a day before. Sterling turned negative after the British data and lost 0.5% to $1.231, retreating from Monday’s seven-month high.

That left the dollar index at 102.04 , in the vicinity of a seven-month low.

Government bonds globally were muted with the benchmark U.S. 10-year Treasury yield down 2 basis points to 3.5042% . Germany’s 10-year yield was steady at 2.19%.

Yields move inversely to prices.

Oil largely held onto recent gains from optimism around China’s reopening. Brent crude was down 0.1% at $88.1, just off Monday’s near eight-week high of $89.09.

Gold was up 0.2%, having earlier hit a new nine-month top, as the precious metal continued to be helped by the weaker dollar.

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