Rising commodity prices push European stocks higher

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European equities rose on Tuesday, with the natural resources-heavy FTSE 100 outperforming as evidence that manufacturers were struggling to source supplies boosted commodities and materials producers.

The Stoxx 600 gained 0.4 per cent in early dealings, with basic materials and energy stocks rising to the top of the regional equity index’s leaderboard. The UK’s FTSE 100 climbed 0.8 per cent, boosted by the same sectors.

Travel shares also rallied after Brussels recommended easing restrictions on non-essential travel for vaccinated non-European nationals ahead of the summer holiday season.

The US Institute for Supply Management said on Monday that its index tracking prices paid by manufacturers jumped four points to 89.6 in April, the highest reading since July 2008. The reading followed a surge in consumer demand driven by the US economic recovery and vaccination drives.

“Recent record-long lead times, widescale shortages of critical basic materials, rising commodities prices and difficulties in transporting products are continuing to affect all segments of the manufacturing economy,” said Timothy Fiore, chair of the ISM manufacturing business survey committee.

The price of copper hit its highest level in a decade last week, while a commodity price index compiled by Bloomberg has gained almost 17 per cent this year. Oil was steady on Monday, with Brent crude futures adding 0.2 per cent to $67.56 a barrel.

The Stoxx was hovering close to an all-time high reached last month. But concerns about price pressures on businesses’ profit margins have weighed on investors despite a strong quarterly earnings season in Europe, analysts said.

More than 60 per cent of European companies that have reported first-quarter earnings have beaten analysts’ forecasts, according to Morgan Stanley strategists led by Ross MacDonald.

Investors have been more likely to mark companies down for missing estimates than to buy shares on the basis of better than expected performance, the Morgan Stanley team found. “The negative skew to price action . . . [is] the strongest we have seen since 2007,” they said.

“Although the data are suggesting it’s a little early to see signs of margin pressures yet, we think this theme will become increasingly relevant,” they added.

In debt markets, the benchmark 10-year US Treasury yield ticked 0.01 percentage point higher to 1.616 per cent. The drop in price came despite the latest assurances from monetary policymakers that the Federal Reserve would continue buying bonds to boost financial markets.

The US economy will grow at the fastest rate in decades this year, but financial conditions were not strong enough for the Federal Reserve to consider pulling back its $120bn a month of bond purchases, New York Fed president John Williams said in comments reported by Reuters on Monday.

Germany’s 10-year Bund yield was steady at minus 0.196 per cent, near its highest since March 2020, as investors looked ahead to the European Central Bank scaling back its own bond purchases as the eurozone recovers from the coronavirus pandemic.

The dollar, as measured against a basket of currencies, strengthened 0.4 per cent. The euro lost 0.4 per cent against the dollar to $1.201.

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