European stocks head towards all-time highs as Fed fears dim

European equities and Wall Street futures nudged higher on Tuesday after US central bankers soothed concerns about the Federal Reserve withdrawing its pandemic crisis monetary support.

Fears of sustained inflation in the US capped the gains at minor levels, however, while driving up prices of oil and gold that investors purchase to safeguard their portfolios against future inflationary shocks.

The Stoxx 600 index rose 0.3 per cent to 443.7 points, near its closing record of 445.4 on May 10. London’s FTSE 100 also added 0.3 per cent.

Futures markets signalled the S&P 500 index would gain 0.3 per cent in early Wall Street dealings, while the top 100 stocks on the technology-focused Nasdaq Composite would add 0.8 per cent.

Investors were struggling to assess whether a lengthy market rally that looked ahead to developed economies emerging from coronavirus lockdowns was set to peak, said Francesco Sandrini, senior multi-asset strategist at Amundi.

“We are standing on a very foggy plateau and we cannot see if we can go up higher or we are coming to a descent,” he said. “But I am cautious that the cycle is changing,” he added, with the dominant narrative that moved stock markets changing to one of a slowing US recovery combined with inflation that eroded the returns from stocks and bonds.

The US Institute for Supply Management’s services activity index hit a record reading of 63.7 in March before moderating to 62.7 in April, Sandrini pointed out.

Professional forecasters surveyed by the Philadelphia Federal Reserve expect average consumer price inflation of 2.3 per cent in the US, above the central bank’s target, for the next 10 years. US consumer price inflation jumped 4.2 per cent in April over the same month last year.

But Fed officials have insisted that the central bank needs to continue its $120bn a month of asset purchases until the US labour market recovers from the pandemic.

“We are still eight million jobs short of where we were pre-pandemic,” Atlanta Fed president Raphael Bostic told CNBC on Monday.

“Until we make substantial progress to close that gap, I think we’ve got to have our policies in a very strongly accommodative situation or stance.”

Brent crude futures rose 0.9 per cent to breach $70 a barrel for only the second time since the start of the pandemic.

“If you think the inflation regime will change more than markets expect, and you want to hedge this, the best way is to add cyclical commodities to your portfolio,” said Guilhem Savry, a strategist at asset manager Unigestion. 

The spot gold price also hit $1,868.3 an ounce, its highest since January.

The yield on the 10-year US Treasury bond, which moves inversely to its price, was up 0.007 percentage points at 1.6471 per cent, up from about 0.9 per cent at the start of the year.

The US dollar, as measured against a basket of trading partners’ currencies, sank 0.4 per cent. Meanwhile, the euro was up 0.5 per cent against the dollar at $1.2218, while the pound was up 0.4 per cent at $1.4194.

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