European shares edged higher as traders bet on central banks tightening monetary policy at a slower pace than previously expected, in a bid to shield their economies from the knock on effects of the Ukraine crisis.
The regional Stoxx Europe 600 index gained 0.2 per cent, as investors balanced the potential economic implications of Russia’s invasion of Ukraine with the possibility that central banks could reverse signals that they were set to withdraw pandemic-era support. Germany’s Xetra Dax added 0.3 per cent and France’s CAC 40 rose 0.6 per cent.
Futures contracts tracking Wall Street’s S&P 500 index rose 0.3 per cent. Those tracking the technology-heavy Nasdaq 100 gained 0.2 per cent.
Brent crude, the international benchmark, climbed more than 7 per cent to $113 a barrel after US President Joe Biden declared Russia as being isolated from the world and hinted at more economic sanctions ahead.
Meanwhile, European natural gas prices hit an all-time high. Futures linked to TTF, Europe’s wholesale natural gas price, rose more than 50 per cent to €185 per megawatt hour before trimming their gains to trade at €167.
Sanctions imposed on Russia by western countries have so far sought to avoid the energy sector but have nonetheless stoked volatility in global markets on concerns over disruptions to supply.
“Brent crude is the biggest fear factor for equity markets,” said Maarten Geerdink, head of European equities at Dutch investment house NN Partners. “If it goes ballistic and moves towards $150 or more a barrel, then [economic] growth really gets hammered.”
Eurozone inflation hit a record high in February, data on Wednesday showed, while consumer prices in the US hit a 40-year high in January.
But markets were also pricing “central banks that care more about geopolitics than inflation,” said Edward Park, chief investment officer at Brooks Macdonald. “The market is priced for central banks to back away, although the risk is that they don’t.”
The yield on Germany’s benchmark 10-year Bund rose 0.05 percentage points to minus 0.02 per cent. But this followed a powerful rally for US, UK and eurozone government bonds on Tuesday as derivatives markets predicted a much slower pace of monetary tightening by central banks, which had been expected to exit pandemic-era monetary support with a series of interest rate rises.
The 10-year US Treasury yield rose 0.06 percentage points to 1.77 per cent. This debt yield, which underpins borrowing costs worldwide, dropped almost 0.1 percentage point on Tuesday and is now near levels last seen in January before Fed chair Jay Powell prepared financial markets for a string of aggressive rate increases.
The latest gains for oil, which left Brent more than 15 per cent higher since President Vladimir Putin launched his invasion of Ukraine, came as Russia stepped up the bombardment of its neighbour’s biggest cities. Prices rose despite the US and 30 other countries saying they would release 60mn barrels from their strategic reserves.
Biden has come under mounting pressure to ban Russian oil imports, with Republicans and Democrats calling on the US president to cut off energy ties with the Kremlin. In his State of the Union speech on Tuesday, Biden voiced support for punitive measures against Russia but stressed that getting prices under control was his “highest priority”.
Russia’s central bank said the Moscow stock exchange, which did not open for trading on Monday, would remain closed on Wednesday.
