EU markets start 2023 on upbeat note on encouraging factory data

European shares rose in the first trading session of 2023 on Monday as euro zone manufacturing data suggested the worst had passed after a year marred by fears of a recession as central banks hiked rates globally.

The pan-regional STOXX 600 rose 0.8%, supported by consumer discretionary stocks. The automobiles and parts sector gained 2.5% and luxury names like LVMH and Kering added about 1.5% each.

“With 10-year bund yields above 2.50%, relaxed year-end trading and the probable drop in HICP inflation are raising hopes for an upbeat start into the year,” Commerzbank Research analysts said in a note, referring to the euro zone consumer prices inflation data due later this week.

An early indicator was data showing the downturn in euro zone manufacturing activity has likely passed its trough as supply chains begin to recover and inflationary pressures ease, leading to a rebound in optimism among factory managers.

The STOXX 600 ended 2022 with sharp losses, driven by central banks’ aggressive policy tightening to rein in soaring prices, an economic slowdown, the Russia-Ukraine conflict that fanned inflationary pressures and growing concerns over COVID cases in China.

Rate-sensitive technology stocks, among the worst-performing shares last year, rose 1.5% on the day, despite more hawkish signals from the European Central Bank.

ECB President Christine Lagarde said euro zone wages are growing quicker than earlier thought and the central bank must prevent this from adding to already high inflation.

Bond yields of Europe’s largest economy, Germany, dropped from their highest levels in more than a decade as investors braced for inflation data this week.

Germany’s finance minister expects inflation in Europe’s biggest economy to drop to 7% this year and to continue falling in 2024 and beyond, but expects high energy prices to be the new normal.

The German DAX gained 1.0%, while other European exchanges also started the year on a positive note. The London and Dublin stock exchanges are closed for the New Year’s day holiday.

The energy sector added 1.3%, tracking firm crude prices.

Croatia rang in the new year with two historic changes, as the European Union’s youngest member joined both the EU’s border-free Schengen zone and the euro common currency.

 World stocks inched higher, European bond yields dropped and the dollar held firm in light trading on Monday following warnings from the International Monetary Fund’s managing director that a third of the world will fall into recession in 2023.

MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.04%, just short of an index of global shares, which climbed 0.21%.

The pan-European STOXX 600 index climbed 0.9%, retracing some of the nearly 12% it lost in 2022, bludgeoned by central banks’ aggressive monetary policy tightening.

Traders were reluctant to trust early-year starts in stock and bond moves with many markets closed for a holiday and ahead of a host of economic numbers due this week.

Inflation data from Europe, minutes from the December U.S. Federal Reserve meeting and U.S. labour market numbers were some of the highlights that Danske Bank chief analyst Piet Haines Christiansen said would be worth watching.

“I would be cautious over interpreting any moves this morning,” said Christiansen.

Markets in Australia, Britain, Hong Kong, Ireland, Japan, Singapore and the United States, were shut.

Christiansen expected the new year to kick off with a renewed focus on central banks and inflation. Traders would be vigilant for any signs of an approaching recession, he said.

Buoyant stock prices in Europe might be due, he said, to survey results published on Monday, which pointed towards a rebound in optimism among euro zone factory managers. S&P Global’s final manufacturing Purchasing Managers’ Index (PMI) bounced to 47.8 in December from November’s 47.1, matching a preliminary reading but below the 50 mark separating growth from contraction.

“Europe is taking the latest round of PMIs well enough, as the final readings help to confirm the view (hope?) that the worst may be over for the EU bloc’s manufacturers, especially as energy prices recede to the levels of last February,” Russ Mould, investment director at AJ Bell, wrote in emailed comments.

Elsewhere, the dollar edged almost 0.1% higher against a basket of major currencies, while the pound and euro fell 0.4% and 0.3% respectively.

“There is an attempt by the dollar index to pull higher today but we do see that it is losing a good part of the strength it gained last year,” said Ulrich Leuchtmann, head of forex research at Commerzbank.

“After the last Fed meeting, the market was not convinced that the Fed won’t cut rates later in 2023. It’s going to be an interesting year.”

US Treasuries will resume trading on Tuesday after a public holiday on Monday.

German government bond yields on Monday tumbled from their highest levels in more than a decade amid more hawkish signals from the European Central Bank (ECB).

Agencies