By Ankur Banerjee and Alun John
SINGAPORE/LONDON (Reuters) – A rally in defence stocks helped European shares to rise on Wednesday, bucking the trend in Asia and the U.S. overnight when strong economic data stoked worries over inflation and caused a spike in bond yields.
Europe’s broad STOXX 600 index rose 0.3% to its highest since mid December. Defence names were to the fore, last up 1.6%, reacting to U.S. President-elect Donald Trump’s call for higher spending from NATO allies, one of several moves this week driven by potential policies from the incoming U.S. administration.
Auto stocks rose and fell on Monday after a report from the Washington Post that tariffs would be less wide ranging than expected, later denied by Trump, and European wind energy stocks fell Wednesday after Trump said he would attempt to ensure no wind turbines are built during his second term.
U.S. share futures also nudged higher up 0.3%.
But the bigger picture for global markets remained the growth and inflation outlook in the United States, which will shape the path of U.S. interest rates, and hence borrowing costs around the globe.
Data on Tuesday showed U.S. job openings unexpectedly increased in November while the U.S. service sector accelerated last month, suggesting the Fed would be in no rush to cut rates.
“The data supports our view the US economy should achieve a soft landing this year to the benefit of risk assets while limiting the Federal Reserve to only 1-2 more rate cuts,” said Mansoor Mohi-uddin, chief economist at Bank of Singapore.
Markets had earlier seen two 25 basis point cuts this year as more likely, but pared back those bets after the data and now only see around a 50% chance of a second move.
Benchmark 10-year Treasury yields gained 7 basis points to 4.699% after Tuesday’s U.S. data, their highest since April, and were last at 4.68%, down a fraction on the day. [US/]
Further U.S. employment data is due this week, with private jobs numbers later Wednesday, but Friday’s non farm payrolls figures are the most important. Inflation numbers next week are January’s other main data release.
Higher U.S. yields boosted the dollar, and put an end to the small rebound in European currencies seen at the start of the week.
The euro was last down 0.25% at $1.0314, close to last week’s more than to year low with investors worried the single currency may fall to the key $1 mark this year due to tariff uncertainties. [FRX/]
The European Central Bank, in contrast with the Fed, is expected to make deep rate cuts, with traders pricing in around 100 bps of easing this year, even though euro zone inflation accelerated in December, according to data on Tuesday.
The Japanese yen was steady at 158.18 per dollar after touching 158.425 on Tuesday, a level last seen in July when Tokyo intervened to support the currency. It slid more than 10% last year against the dollar and has had a rough start to 2025.
Asian stocks had struggled earlier in the day with MSCI’s broadest index of Asia-Pacific shares outside Japan dropping 0.57%.
Chinese markets were again the focus. Onshore bluechips and Hong Kong were each down 1.7% earlier in the day, but rebounded and closed only just in negative territory as traders digested Beijing’s latest efforts to soothe investor nerves after a stuttering start to the year. [.SS]
In commodities, oil prices rose, on reduced supply from Russia and Opec members, with Brent crude up 0.67% at $77.57 per barrel, while U.S. West Texas Intermediate (WTI) crude was 0.96% higher at $74.95 a barrel. [O/R]
(Editing by Jacqueline Wong, Lincoln Feast, Kate Mayberry and Christina Fincher)
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