Stocks in Europe high on optimism about economy

European stock indexes saw a slight increase in early trading on Monday, driven by hopes that inflation may have peaked and a softening of expectations for future Federal Reserve rate hikes. The MSCI World Equity index was up 0.3% and Europe’s STOXX 600 and London’s FTSE 100 both saw a 0.2% increase. This follows a rally on Wall Street at the end of last week, driven by a jump in Netflix and Alphabet shares.

This optimism was supported by signs of inflation softening, falls in commodity prices, and the easing of COVID-19 restrictions in China. Money markets are now pricing in a 98% chance that the Fed will raise rates by 25 basis points next month and have lowered the likely peak to 4.75% to 5.0%, from the current 4.25% to 4.50%.

Investors are now waiting for flash PMI data on Tuesday, which is expected to show less severe economic contractions than the previous month, according to analysts polled by Reuters. The data is forecast to show more improvement in Europe than in the United States.

The U.S. dollar index was down 0.3% at 101.59, while the euro saw a 0.6% increase at $1.0918, having hit a nine-month high of $1.0927. The British pound also saw a 0.1% increase at $1.2409, and the Australian dollar, seen as a liquid proxy for risk appetite, was up 0.6% at $0.701.

Euro zone bonds were little changed, with the benchmark 10-year German yield at 2.19%, and oil prices edged higher, with Brent crude up 0.5% and U.S. crude up 0.4%.

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