Stock markets switched higher yesterday as sentiment towards the possibility of a US rate hike changed to positive, with investors awaiting a fresh glimpse into the minds of Federal Reserve policymakers.
Wall Street had fallen on Tuesday as strong US economic data fuelled talk of a rate rise as early as next month, with most Asian exchanges following its lead yesterday as did European markets initially.
Higher interest rates are generally not positive for stock markets as higher borrowing costs leave both companies and individuals with less money for other spending.
Moreover, there are concerns stocks are over-priced in certain markets.
But during trading yesterday “worries that a US rate hike in June could bring down inflated asset prices turned to optimism about the implications of higher interest rates for bank earnings,” said analyst Jasper Lawler at CMC Markets.
“The turnaround in banking shares which have seen net interest margins compressed in the era of low (and negative) interest rates offset weakness in commodity shares,” he added.
London’s benchmark FTSE 100 index ended the day essentially flat, while both Frankfurt’s DAX 30 and the Paris CAC 40 each gained about half a percentage point.
Banking shares were big gainers.
RBS was top on the FTSE-100 leader board by jumping 4.6 % and Barclays climbed 3.7 %.
Both Commerzbank and Deutsche Bank gained 2.3 % in Frankfurt, while BNP Paribas rose 1.5 % and Societe Generale added 1.4 % in Paris.
Wall Street was also higher approaching midday, with the Dow up 0.2 %, led by JPMorgan Chase with a 3.2 % gain.
Investors will later be scouring the minutes from the Fed’s April meeting for indications that a raise in US interest rates could be back on the table at the June meeting as the markets begin to take more seriously the possibility of more than one rate hike this year.
Asian stock markets mostly fell after a two-day rally, taking the baton from Wall Street which had fallen overnight as strong US economic data fuelled talk of a rate rise as soon as next month.
In Asia, data revealed that the world’s number three economy Japan expanded 0.4 % in the first three months of the year, boosted by a pick-up in consumer spending.
The country’s benchmark Nikkei stock index spent much of the day in positive territory.
But the upbeat GDP figure was offset by fears it could allow the Bank of Japan to delay any fresh stimulus.
In foreign exchange activity, the euro declined against the dollar.
In London, the FTSE 100 down 0.03 % at 6,165.8 points; Frankfurt - DAX 30 up 0.5% at 9,943.23 points and Paris - CAC 40 up 0.5% at 4,319.30 points at the close yesterday.