European shares slightly higher ahead of economic data

by Jonathan Adams
economic data

The pan-European STOXX 600 index rose 0.1% closing just below record highs touched last week

European shares closed slightly higher on Monday, with defence stocks in the lead, but gains remained in check as investors awaited economic data against an uncertain backdrop on the outlook for interest rate cuts.

The pan-European STOXX 600 index rose 0.1% ending just below record highs touched last week. The aerospace and defence sector led sectoral gains with a 1.9% rise.

The technology sector jumped 0.8% in the lead up to AI bellwether Nvidia’s first-quarter results expected later in the week out of the U.S.

Limiting gains on equities, euro zone sovereign bond yields jumped for the second day, with markets awaiting latest eurozone business activity data later in the week, which could provide clues on the ECB’s monetary path.

The fact that inflation is likely to drop below 2% temporarily after the summer indicates that a majority of ECB policymakers feel that it is safe to start easing policy in June before re-assessing the inflation outlook and possibly pausing in the autumn, analysts at Societe Generale said in a note.

Late last week board member Isabel Schnabel said in an interview with Nikkei that the European Central Bank may cut interest rates in June, but should be cautious about further cuts in borrowing costs given uncertainty over the outlook.

Markets are pricing in almost 65 bps of ECB rate cuts in 2024, according to LSEG’s rate probabilities app, compared with 67 basis points on Friday.

The STOXX 600 index started the month of May with a nine-day winning streak that culminated in a record-high, and while the outlook for interest rates remains cloudy, analysts have highlighted further gains are on the horizon once the European Central Bank’s monetary easing cycle begins.

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