European shares, US bond yields rise ahead of Fed rate decision

European shares climbed on Wednesday, albeit in thin volume, and short-term US bond yields held near four-and-a-half-year highs as investors braced for the possibility of the first interest rate hike in the United States in almost a decade.

The pan-European FTSEurofirst 300 index advanced 1 per cent while the euro zone’s blue-chip Euro STOXX 50 index also rose 1.1 per cent.

Luxury goods group Richemont surged 6.7 per cent after reporting higher sales, boosting the shares of its rivals such as Burberry and LVMH, while fashion group Inditex also progressed 3 percent after reporting higher sales. However, shares in French aircraft cabin and systems maker Zodiac slumped nearly 20 per cent after the company warned that delays to its production of aircraft seats would hit profits.

Asian shares followed Wall Street higher overnight. The FTSEurofirst has risen nearly 10 per cent from a low last month. Yet it also remains down by a similar amount from its peak two months ago, due to concerns about the impact to markets if the Fed does raise rates and worries over a China slowdown. "I'd be looking to sell into rallies. The underlying global economy has stalled," said Terry Torrison, managing director at Monaco-based McLaren Securities.

Torrison said some investors were buying small positions in European financial stocks, as banks and insurers often outperform in a higher interest rate environment since higher rates can boost their profits.

Nevertheless, higher rates are typically bad for equities as they boost the appeal of bonds and cash by raising returns on those assets, and an interest rate hike can also lead to higher debt costs for companies listed on stock markets. Hantec Markets’ analyst Richard Perry said equity traders would be looking to the bond and foreign exchange markets for direction, and added that any strength in the US dollar could be good for European shares as it would help European exporters.

The European Central Bank’s economic stimulus measures would provide further support for European stocks, added traders, with the FTSEurofirst still up 4 per cent since the start of 2015. “Any strength in the dollar would be positive for the German Dax,” said Perry.

Reuters