Markets Rise as Focus Shifts to Economy

European markets turned higher on Wednesday as investors focused their attention on fundamental economic developments this week.

Shares rose despite worries over the nuclear crisis in Japan and Libya’s violent conflict. In addition, the euro hit a 15-month high against the dollar on expectations the European Central Bank would raise interest rates later this week.

“It seems that the geopolitical concerns that have haunted markets recently are easing,” Yusuf Heusen, a senior sales trader at IG Index, said.

Interest rates considerations are taking center stage, with several central banks issuing policy statements this week.

Already the People’s Bank of China has raised its main interest rate for the fourth time since October as it tries to keep a lid on rising inflationary pressures.

The European Central Bank is poised raise rates on Thursday, the first increase in nearly three years, as it too worries about inflation. A quarter-percentage-point increase in the main rate to 1.25 percent has already been priced into the markets so investors will be more interested in what the central bank’s president, Jean-Claude Trichet, says in his monthly news conference.

Many analysts think that he will continue to sound a relatively hawkish tone and that has helped the euro clamber above $1.43 for the first time since last May.

Jane Foley, senior currency strategist at Rabobank International, thinks the markets may be getting ahead of themselves in expecting interest rate increases in Europe and that, as a result, the euro may struggle to push much higher.

“We see risk that the E.C.B. could signal that they may not hike rates as aggressively as the market is prepared for this year,” Ms. Foley said. “This would likely take some of the wind out of the euro’s sails.”

The euro’s ascent since it hit a multiyear low around $1.18 last summer has taken many currency traders by surprise, not least because Europe’s debt crisis continues to brew, with Portugal widely expected to become the third euro country after Greece and Ireland to get an international bailout.

Though Portugal managed to raise about a billion euros ($1.4 billion) in a Treasury bill sale Wednesday, it had to pay substantially more to get the cash than it had to at previous auctions.

For now, interest rate policy remains the key to the euro’s gains, especially as the European bank’s peers, like the Federal Reserve and the Bank of Japan, are not expected to start raising borrowing costs just yet, though the Bank of England could well be tightening policy in the next month or two.

However, analysts said the Fed is showing signs that it is ready to change course after it brings its current $600 billion monetary stimulus to an end in June. Though it may not raise interest rates this year, it seems the Fed policy makers are preparing to begin withdrawing some of the extraordinary measures implemented during the financial crisis.

The minutes to the last Fed rate-setting meeting, published Tuesday, indicated that the “normalization” process would begin in the coming months, and that process would eventually lead to an increase in the main Fed funds rate from the current 0 to 0.25 percent range.

The reaction to the Fed minutes has been fairly muted in markets.

The Dow Jones industrial average was up 33.26 points, or 0.27 percent. While the Standard Poor’s 500-stock index gained 3.33, or 0.25 percent. The technology heavy Nasdaq added 14.37, or 0.51 percent.

In London, the FTSE 100 index was up 0.72 percent while the DAX in Frankfurt rose 0.67 percent. The CAC 40 in Paris rose 0.3 percent.

Bond prices fell, pushing yields up. The yield on the 10-year Treasury note rose to 3.51 percent from 3.49 percent late Tuesday.

In the oil markets, the apparent stalemate in Libya, which accounts for a little under 2 percent of daily oil production, kept prices high. The benchmark rate in New York was 7 cents a barrel higher at $108.41.

Earlier in Asia, Japan’s battered Nikkei 225 closed down 0.3 percent to 9,584.37, while Hong Kong’s Hang Seng gained 0.6 percent to 24,285.05 . In China, the Shanghai Composite Index returned from a holiday to close 1.1 percent higher at 3,001.36.

Article source: http://www.nytimes.com/2011/04/07/business/07markets.html?partner=rss&emc=rss