Rise of European Stock Markets Ahead of Tomorrow’s ECB Meeting, Mild Rise on Wall Street

On European stock markets, there is a positive mood on Wednesday morning, influenced by strengthened expectations that the Fed will lower interest rates in September after weak data from the U.S. labor market was released, as well as expectations that the European Central Bank will lower interest rates in the eurozone tomorrow.

The pan-European STOXX 600 was up 0.5 percent around 10:00 AM, recovering from yesterday’s loss. All major European sector indices are recording growth, led by a 1.7 percent increase in the retail sector, as Inditex’s stock, the owner of Zara, rose 4.7 percent on the back of better-than-expected sales data for the first quarter.

At the same time, the Frankfurt DAX gained 0.59 percent to 18,515 points, the London FTSE index rose 0.29 percent to 8,255 points, and the Paris CAC increased by 0.52 percent to 7,979 points.

Thanks to Inditex’s stock, the Spanish stock index IBEX outperformed the regional exchanges, rising by 0.76 percent.

On Wall Street, the major indices slightly rose the day before, and most regional indices in Asian markets were also in the plus, after data showed that the number of job openings in the U.S. decreased in April, signaling weakness in the labor market. This solidified investors’ belief that the Fed will begin a cycle of easing monetary policy in September.

Meanwhile, investors are focused on the ECB’s decision on the key interest rate on Thursday, with a 25 basis point cut expected from the current record level of 4 percent.

U.S. Labor Market Data Supports Growth on Wall Street

On Wall Street, the major indices finished trading slightly up on Tuesday, thanks to weaker-than-expected data from the labor market in the world’s largest economy, which strengthened investors’ expectations that the Fed will lower interest rates.

The New York Dow Jones index rose by 140.26 points or 0.36 percent to 38,711 points, while the S&P 500 index increased by 0.15 percent to 5,291 points, and the Nasdaq rose by 0.17 percent to 16,857 points.

Yesterday brought investors the first insight into the situation in the U.S. labor market, with the release of data on job openings and labor turnover, known as JOLTS, which showed that there were 8.06 million job openings in April, the lowest number in over three years, and nearly 400,000 lower than economists’ forecasts.

This data signals to market participants a softening demand in the labor market, which supports the expectation that the Fed may begin lowering interest rates this year, and this has supported the rise in stock prices, after it was announced earlier in the week that industrial activity had weakened for the second consecutive month.

The next significant set of employment statistics will arrive on Wednesday with the release of data from the ADP employment agency, and economists predict it will show that private employers created 175,000 jobs in May, while the U.S. Department of Commerce’s employment data is expected to be released on Friday.

– Upcoming labor market data releases are clearly in focus for the market, as they are all important data from a monetary policy perspective – emphasized Bill Northey, investment director at U.S. Bank Wealth Management.

Cautious Trading on Asian Markets

On Asian markets, the major indices had mixed signals on Wednesday, while the dollar exchange rate slightly recovered after weakening the day before, as the latest data from the U.S. labor market indicates a weakening demand for workers, which supports expectations that the Fed may begin lowering interest rates in September.

The MSCI Asia-Pacific index excluding Japan was up 0.24 percent around 6:00 AM. The Japanese Nikkei fell by 1.14 percent, dropping from its highest level in the last two weeks, and the Shanghai stock index also fell by 0.36 percent, while the South Korean Kospi rose by 1.12 percent, and the Hong Kong stock index increased by 0.35 percent.

The latest data from the U.S. labor market showing the lowest number of job openings in April in over three years, i.e., 8.06 million, has somewhat reduced investors’ appetite for risky stock investments, and the focus is also on the Indian stock market, where stock prices and the rupee exchange rate have fallen as the election results in that country showed a ‘thinner’ victory for Prime Minister Narendra Modi’s party than expected.

His party, Bharatiya Janata, lost its absolute majority in the lower house of parliament. However, Modi is poised for a third term in office after the National Democratic Alliance led by the BJP secured 294 seats, more than the 272 needed for the coalition to form a government. Investors are currently cautious until they see what economic policies Modi will implement in the new term.

The dollar index, which measures the dollar’s exchange rate against six major world currencies, stood at 104.14 points this morning, after weakening near its lowest level in almost two months at 103.99 points on Tuesday.

Recent dollar strength over the next 12 months could be shaken, currency strategists in a Reuters survey point out, who generally agreed that the dollar is overvalued.

– If inflation persists, it may not prompt the Fed to raise interest rates, but it will force the market to reassess its expectations of how patient the Fed will actually be in lowering interest rates this year, and time is running out. Along with inflation data, bad news about economic growth is likely to directly negatively impact the dollar, unless concerns about recession intensify – notes Daragh Maher from HSBC.

The yen exchange rate reached its highest level in the last two weeks at 154.55 yen on Tuesday, and this morning it slightly weakened, trading at 155.48 yen per dollar. The euro exchange rate, on the other hand, weakened by 0.32 percent against the dollar to 1.0877 dollars.

On the oil markets, prices of barrels slightly weakened, with Brent down 0.1 percent to 77.47 dollars, and WTI down 0.2 percent to 73.16 dollars.