European shares hit 23-month high on energy and bank boost

European stock markets opened higher on Tuesday as traders bet on central banks cutting rates in 2024, oil prices gained after a naval clash in the Red Sea, and Chinese stocks were weighed down by mixed economic data.

Global stock markets rose overall in 2023, having gained particularly in the last two months of the year, while bond yields fell. This upbeat market sentiment continued on Tuesday as traders returned from end-of-year holidays.

The pan-European STOXX 600 was up 0.4 per cent by 0920 GMT, hitting a 23-month high, after a long weekend for New Year Day holiday. Eurozone bank stocks rose to their highest since 2018. London’s FTSE 100 was up 0.2 per cent and Germany’s DAX was up 0.8 per cent.

The MSCI World Equity index was steady, down by less than 0.1 per cent on the day.

“There is a feeling that (monetary) easing is coming and it seems like there is more to go in the rally in the short term,” said Nordea chief analyst Jan von Gerich. “I think there’s a risk to the downside for stocks but the momentum is strong right now,” he said.

Data pointing to subdued business confidence in China for 2024 weighed on Chinese assets during Asian trading.

China’s manufacturing sector came under pressure from weak demand in 2023, with a property downturn, geopolitical factors and tight-fisted consumers all weighing on the post-pandemic recovery.

China’s onshore blue chip index was down 1.3 per cent and Hong Kong’s Hang Seng index fell 1.5 per cent.

The US dollar index was up around 0.1 per cent at 101.44, holding relatively steady after it lost roughly 2 per cent last year on bets that US rates will come down.

The US 10-year Treasury yield, which gained overall in 2023, rose to 3.9425 per cent.

Market attention is now focused on economic data due later in the week, including the US non-farm payrolls report on Friday which could provide clues as to the US Federal Reserve’s next move. Minutes from the last Fed meeting in December are also expected to give insight into central bankers’ thinking regarding rate cuts.

At its December policy meeting, the Fed adopted an unexpectedly dovish tone and forecast 75 basis points in rate reductions for 2024. Other major central banks, including the European Central Bank (ECB) and Bank of England (BoE), have indicated that they will hold rates higher for longer.

In Europe, flash inflation figures for the eurozone are due on Friday, which RBC Capital Markets analysts said in a note are “likely to be the most significant additional data point prior to the January ECB meeting”.

“Anything barring a large increase in inflation would represent a significant surprise,” the analysts said.

The euro against the dollar was down around 0.1 per cent at $1.10315.

Euro zone government bond yields rose, with the benchmark 10-year German yield up 8 basis points on the day at 2.106 per cent.

German manufacturing activity continued to contract in December, but expectations for future business turned positive for the first time since April, survey data showed on Tuesday.

Oil prices rose, in a move analysts said was due to an escalation in tensions in the Red Sea as well as hopes for strong demand from China, where investors are expecting fresh stimulus measures.

US helicopters repelled an attack on Sunday by Iran-backed Houthi militants on a Maersk container vessel in the Red Sea, sinking three Houthi boats and killing 10 militants. Investors are weighing up the risks of the Israel-Gaza war becoming a wider regional conflict, which could close crucial waterways for oil transport.

Brent crude rose 1.8 per cent to $78.43 a barrel while US West Texas Intermediate crude was at $72.85 a barrel, up 1.7 per cent.

The head of energy firm E.ON said that instability in the Middle East could send energy prices soaring. Gold was up 0.6 per cent at $2,074.89 an ounce.

Signs of economic woes were underscored by a survey showing eurozone factories ended 2023 on the back foot, with activity contracting in December for the 18th straight month.

Among major economies, German manufacturing activity continued to contract although expectations for future business turned positive for the first time since April. The German benchmark DAX, however, jumped 1 per cent, outperforming most of its regional peers.

Among major sector gainers, eurozone banks jumped to their highest level since May 2018, led by a 2 per cent -3.7 per cent rise in Italy’s Monte dei Paschi, Spain’s Sabadell and BBVA. Energy shares also advanced 1 per cent, tracking higher oil prices.