Europe close: Shares rally as US jobs data sparks rate cut hopes

(Sharecast News) - European shares staged a late afternoon rally to close higher on Thursday as investors shrugged off boiling tensions in the Middle East, as US job market figures helped boost hopes of early rate cuts this year.

The pan-European Stoxx 600 index finished the session 0.7% higher at 477.68 with all major regional bourses higher.

Shares fell on Wednesday after a bombing in Iran killed more than 100 people and assassination of the deputy leader of Islamic group Hamas in Lebanon raised fears that Israel's war in Gaza would become a regional conflict.

"It hasn't been a wonderful start to 2024, but despite a more hawkish set of Fed minutes markets have managed to edge higher on both sides of the Atlantic. While the ADP payroll report came in solidly above expectations, it nonetheless represented a slowdown from November's figure, reinforcing hopes that the Fed is on course to cut rates in the first half of the year," said IG chief market analyst Chris Beauchamp.

"But the inflation dragon is not yet slain, a point confirmed by today's German inflation figures. Investors will hope that the surge is a one-off due to the end of government subsidies, though with the Red Sea disruption affecting more and more shipping it seems we could be in for a resurgence of inflation."

"Stocks are pricing in a dovish path from here, and a change to this narrative could finally spark an extended burst of volatility."

Private sector employment in the US rose more than expected in December, according to figures released on Thursday by ADP.

Employment increased by 164,000 from November, versus expectations for a 115,000 jump. November's gain was revised down to 101,000 from 103,000.

Americans lined up for unemployment benefits at a decelerated clip in the week ended 30 December, according to the Labor Department, hitting the lowest claim count since October.

Jobless claims in the US fell by 18,000 to 202,000 in the final week of the year, firmly below market expectations for a reading of 216,000. The previous week's level was revised up by 2,000 to 220,000

In economic news, business activity in the eurozone continued to contract at the end of last year, with survey data published on Thursday indicating the single currency bloc went into recession.

RECESSION FOR EUROZONE?

The eurozone composite purchasing managers index (PMI) - a good measure of economic health - was revised upwards to 47.6 from a flash estimate of 47 to match the final reading for November.

Meanwhile the services PMI edged ahead to 48.8 from November's 48.7, a five-month high but still below the 50 mark separating contraction from expansion.

Flash estimates for Germany's consumer price index (CPI) for December showed a sharp uptick in annual inflation, though it was largely as expected after a plunge in energy prices the year before.

The year-on-year change in the CPI rose to 3.7% last month, from 3.2% in November, slightly under the 3.8% consensus estimate.

Energy prices were 4.1% higher than December 2022, compared to a 4.5% year-on-year drop in November, after the prior year's one-off fiscal subsidy to support households during the energy crisis

As such, the core measure which excludes volatile items like food and energy, actually eased to 3.5% from 3.8% the previous month.

Economist Claus Vistesen from Pantheon Macroeconomics said that the drop in core inflation adds to evidence "that a sustained downtrend in underlying inflation is now underway".

Vistesen said: "Looking ahead, we look for a significant drop in inflation in January, driven by declines in both the core and headline. We think the national headline will drop to around 2% in January,"

Oil prices traded higher with both Brent crude and West Texas Intermediate gaining more than 1% as concerns about attacks on shipping in the Red Sea by Iran-backed Yemeni Houthi militants and a shutdown of an oilfield in Libya added to supply worries.

In equity news, shares in German biotechnology company Evotec slumped after chief executive Werner Lanthaler unexpectedly quit.

Retail stocks were in focus as JD Sports Fashion also nosedived by almost a quarter after a profit warning, while shares in fellow UK clothing and homewares retailer Next jumped after the company lifted annual guidance driven by better-than-expected Christmas sales.

Reporting by Frank Prenesti for Sharecast.com