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Europe Markets: European stocks add to gains as investors aren’t scared of U.S. inflation spike

European stocks climbed on Friday, as investors decided stronger-than-expected U.S. inflation wasn’t much to worry about, while falling bond yields increased appetite for equities.

Investors will also be keeping an eye on the G-7 (Group of Seven) meeting of leaders in Cornwall, England on Friday.

Shaking off a sluggish start, the Stoxx Europe 600 index
SXXP,
+0.70%
,
up nearly 1% for the week so far, climbed 0.5%, while the German DAX
DAX,
+0.76%

rose 0.5%, with the French CAC 40
PX1,
+0.84%

and the FTSE 100
UKX,
+0.62%

up 0.6% and 0.5%, respectively.

U.S. stock futures
ES00,
+0.22%

YM00,
+0.35%

NQ00,
+0.13%

turned higher, following a positive day on Wall Street, with the S&P 500
SPX,
+0.47%

logging a record finish, as investors brushed aside data showing annual U.S. consumer prices climbed 5% in May to a 13-year high.

Yields continued to fall on both sides of the Atlantic, with that of the German 10-year bund
TMBMKDE-10Y,
-0.272%

down 1 basis point to -0.272%, and the 10-year U.S. Treasury bond yield
TMUBMUSD10Y,
1.456%

down 2 basis points to 1.441%.

Read: Inflation is surging. How high will it go? Check out MarketWatch’s new tracker.

Markets have been concerned that signs of rising inflation globally will push central banks to tighten ultra-easy monetary policies and stimulus enacted to fight the COVID-19 pandemic fallout. But the Federal Reserve has been fairly consistent in its reassurances that the data are transitory.

“It appears as though the market is so confident that the Fed will maintain its current policy stance that even a 5% CPI [consumer-price index] inflation in the U.S. didn’t scare the markets,” said Fawad Razaqzada, market analyst at ThinkMarkets.

“With stocks rising, and both the dollar and yields falling, investors clearly believe that the Fed will still stick to script next week and re-iterate its view that the upsurge in prices is going to be temporary,” he said in a note to clients. The drop in bond yields has sparked appetite for all risk assets, notably low and zero-yielding assets such as technology growth stocks and precious metals, he added.

Razaqzada said markets were also relieved to see a dovish European Central Bank, which on Thursday left interest rates unchanged and made no tweaks to the size of its asset-buying programs at its policy meeting. 

Read: No ECB ‘taper tantrum,’ but stage set for market showdown later this year

On the data front, the U.K. economy expanded 2.3% in April, its fastest monthly pace since July 2020, the Office for National Statistics said.

Banks were a weak spot for Europe, falling in step with bond yields. Shares of Deutsche Bank
DB,
-1.92%

slid 3%, those of Société Générale
GLE,
-0.91%

lost 1.6%, and Crédit Agricole
ACA,
-0.32%

dropped 1%.

But resource stocks were rising, with metals pricing climbing. Shares of miners Rio Tinto
RIO,
+1.51%

RIO,
+0.03%

and Glencore
GLEN,
+2.91%

were up 1% and 2%, respectively.

Pharmaceutical stocks rose, with shares of AstraZeneca
AZN,
+1.18%

AZN,
+2.15%

up 1.3% and Bayer
BAYER,
+0.84%

rising 1%.

Another gainer was LVMH Moët Hennessey Louis Vuitton
MC,
+1.87%
,
with those shares up 1.8%. Loïc Morvan, an analyst at Bryan Garnier, reiterated a buy rating on the luxury-goods group in a note to clients, saying he expects second-quarter sales to grow near 10% versus the second quarter of 2019.

“We remain quite optimistic on LVMH. We see no signs of a business slowdown in the U.S. (23% of sales) or APAC (41% of sales). Demand for luxury products from the Chinese and American clienteles is still robust,” said Morvan. First-half results for LVMH are expected in July.

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