European stocks head for third consecutive daily gain

European stock markets marched higher on Wednesday after a senior Federal Reserve official soothed concerns that the US central bank could withdraw its emergency support for financial markets sooner than expected.

The regional Stoxx 600 benchmark added 0.6 per cent in early trading, putting it on track for its third consecutive daily gain, while London’s FTSE 100 rose 1.2 per cent and Germany’s Xetra Dax gained 0.8 per cent.

Federal Reserve governor Lael Brainard said on Tuesday evening that last week’s wild ride in US government bond markets driven by bets of a strong economic recovery from coronavirus feeding inflation had “caught my eye”.

A government bond sell-off, which pushed the yields on 10-year Treasury bonds from just above 0.9 per cent at the start of the year to just over 1.6 per cent last week, has disturbed stock markets by changing the so-called risk-free rate that underpins a wide range of assets.

The drama in the Treasury market partly reflects bets by some traders that the Fed will tighten monetary policy in response to rapid economic growth. Brainard said in comments reported by Bloomberg that it would take “some time” for the central bank to wind down its $120bn-plus of monthly asset purchases it has carried out since last March.

The yield on the 10-year US Treasury was steady at just above 1.42 per cent on Wednesday morning, while Germany’s equivalent bond traded flat at minus 0.34 per cent.

“Everything is pivoting on interest rates at the moment,” said Tancredi Cordero, chief executive of investment strategy boutique Kuros Associates.

After a series of record highs for global equities as recently as last month, equities were “priced for perfection” and “very sensitive” to interest rate expectations that determine how investors value companies’ future cash flows, Cordero added.

Volatility in bond and stock markets, he said, would likely continue at least until the US Senate voted on president Joe Biden’s $1.9tn economic stimulus package in coming days.

In currency markets, sterling added 0.1 per cent against the dollar to $1.3968 ahead of UK chancellor Rishi Sunak outlining his latest Budget.

He is expected to extend a vast package of Covid-19 support, including pay for furloughed workers until the end of September, in a plan to nurse Britain back to economic health by the autumn.

UK government bonds, which investors have sold off in line with US Treasuries and in anticipation of further government borrowing, remained out of favour on Wednesday with the yield on the 10-year gilt adding 0.02 percentage points to 0.71 per cent.

Brent crude, the international oil benchmark, gained 0.4 per cent to just under $63 a barrel.

Asia’s stock markets also made gains, with China’s CSI 300 index rising 1.9 per cent and South Korea’s Kospi 200 adding 1.3 per cent.

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