European shares rose in volatile trading, buoyed by a reaffirmation of ultra-loose monetary policy and a bipartisan agreement on a huge U.S. infrastructure spending plan. The pan-European STOXX Europe 600 Index finished the week 1.23% higher. The main stock indexes also posted gains. Germany’s Xetra DAX Index rose 1.04%, France’s CAC 40 0.82%, and Italy’s FTSE MIB 1.16%. The UK’s FTSE 100 Index added 1.69%.
BoE policymakers voted unanimously to keep the key interest rate at 0.1% and by eight to one to maintain the asset purchase program until the end of the year. The central bank stated inflation could reach as high as 3% and economic growth would be strong, but the increases would be temporary.
Core eurozone government bond yields ended the week marginally higher. German bund yields initially tracked rising Treasury yields, and were then elevated further by strong purchasing managers’ index (PMI) data and business confidence readings. Yields then fell in sympathy with the Bank of England’s (BoE) pacifistic outlook, before inching back up ahead of Friday’s U.S. inflation print. Peripheral eurozone bond yields also varied, while UK gilt yields ended lower after the BoE reaffirmed its view that near-term inflation strength would be transitory.
US Stocks bounced back from the previous week’s declines, bringing the S&P 500 Index and the technology-heavy Nasdaq Composite index to new highs and assisting both record their best weekly gains since early April. Energy shares fared best within the S&P 500 as oil prices reached their highest levels since October 2018 on decreasing global inventories. Utilities and real estate stocks lagged.
Inflation fears appeared to resurface late in the week. The yield on the benchmark 10-year Treasury note jumped on Friday morning following a report that the Fed’s preferred inflation gauge– the core (less food and energy) personal consumption expenditures index– had risen 0.5% in May, bringing the year-on-year increase to its fastest pace (3.4%) since 2008.
Japanese stocks had a turbulent start to the week, falling sharply on the first trading day before rebounding on the second. Sentiment soured after the U.S. Federal Reserve’s hawkish pivot increased concerns about an earlier-than-expected tapering of its accommodative policies. Reassurances from the central bank that it will continue its supportive stance to ensure the sustained improvement of the economy helped stabilise markets.
The Nikkei 225 Index returned 0.35% for the week. The TOPIX was up 0.83%. The Japanese yen fell against the U.S. dollar to its lowest level since March 2020 during the week. The yield on the Japanese 10-year government bond fell to 0.05%.
China’s large-cap CSI-300 Index added 2.7% and the Shanghai Composite Index rose 2.3%, ending a three-week losing streak. Financial stocks led the rally after the People’s Bank of China (PBoC) injected liquidity into the financial system for the first time since February.
The yield on China’s 10-year sovereign bond fell 10 basis points, closing the week at 3.10%. In currency markets, the renminbi began the week on a weak note but subsequently rallied to end flat against the U.S. dollar at RMB 6.453.
Last week saw oil prices rise for a fifth week, reaching their highest since October 2018, on expectations demand growth will outstrip supply and OPEC+ will be cautious in returning more crude to the market from August.
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