European equities rose to their highest level in three months on Thursday after a better-than-expected German business confidence report lifted investor hopes for a modest slowdown in the region’s largest economy.
The regional Stoxx Europe 600 added 0.5 percent, continuing a run in which the reference index rose more than 9 percent last month. London FTSE 100 closed flat. US markets were closed for Thanksgiving.
Germany’s DAX rose 0.8 percent after the latest Ifo Institute index showed confidence among 9,000 companies rose from 84.5 in October to 86.3 in November, ahead of a Reuters poll predicting a reading of 85.
“Markets are now pricing in a bearish outlook in Germany just as data points to a better outlook,” said Agnes Belash, chief European strategist at Barings Investment Institute.
“It makes the work of the European Central Bank more delicate,” Belash said. “It will have to tighten financial conditions to send inflation expectations and wage settlements lower, just as the economy is showing signs of an incipient recovery after a hard hit.”
Traders shrugged on news that the yield differential on German two-year and 10-year debt widened to its widest level since 1993.
Long-term debt typically yields higher returns than short-term debt to compensate investors for the risk of inflation eroding their returns. So-called yield curve inversion, when the opposite is true, usually precedes a recession.
Germany’s yield curve inverted for the first time in 29 years in early November, although the difference between the two yields narrowed slightly on Thursday. The two-year interest rate fell by 0.03 percentage point to 2.11 percent and the ten-year interest rate fell by 0.07 percentage point to 1.85 percent. Yields fall when prices rise.
Equity investors were also boosted by overnight gains on Wall Street after the minutes of the Fed’s November meeting showed officials believe their policy of aggressive rate cuts has won the battle against inflation. started to bear fruit.
“Financial conditions tightened significantly in response to the Committee’s policies, and their effects were clearly visible in the most interest-sensitive sectors of the economy,” the minutes said.
The central bank has raised interest rates by 0.75 percent four times in a row. “The Fed was willing, willing and concerned to slow the walking pace because they still believe they can slow inflation without a recession and rising unemployment,” said Steven Blitz, chief US economist at TS Lombard. In December, he said the Fed “would regret that day if they don’t.”
In Asia, Hong Kong’s Hang Seng index rose 0.8 percent and Japan’s Topix rose 1.2 percent.