Europe Stocks Up Ahead of Central Bank Moves

European stocks ticked higher Monday but investors remained cautious ahead of policy decisions from two of the world's major central banks this week.

The Stoxx Europe 600 rose 0.64% late morning, with the German DAX and the French CAC 40 rose 0.9% and 0.7% respectively.

Irish shares fared best, powering ahead more than 1% after airline Ryanair Holdings PLC posted a 4% profit increase and stuck to its earnings target for the year, despite the impact of the U.K.'s decision to leave the European Union.

The British FTSE 100 was up about 0.1%.

Nevertheless, markets appear only moderately optimistic ahead of U.S. Federal Reserve and Bank of Japan policy decisions this week, with early economic data suggesting the impact of Brexit will be contained to the U.K.

Recent economic figures from the U.S. were more positive than previously expected, driving policy makers to signal they could raise interest rates this year. Most investors believe fears that a stronger dollar would rattle global markets—increasing debt-servicing costs in emerging economies—will dissuade rate-setters at the Fed from acting before December.

By contrast, pressure is building up on BOJ Governor Haruhiko Kuroda to deliver a new round of monetary stimulus on Friday. The yen traded lower against most major currencies on Monday.

Many analysts expect Japan will eventually enable the BOJ to either finance government spending or directly inject cash into the economy, a policy known as "helicopter money," even though Mr. Kuroda has so far ruled out this possibility. While few expect such an action as early as Friday, failure to deliver an adequately sizable stimulus could cause the yen to shoot higher and domestic share prices to plunge.

"The Japanese economy needs stimulus and it will come in the form of monetary policy now and fiscal policy later in the year," said Salman Ahmed, chief investment strategist at Lombard Odier Investment Managers, who called the BOJ's meeting this week "quite critical" for markets.

Fears that the Japanese central bank might under-deliver curbed investor appetite for Asian stocks before the European market open. The Nikkei Stock Average, the Shanghai Composite Index and South Korea's Kospi were all mostly flat was Monday. Australia's S&P ASX 00 was up 0.6%.

Investors have navigated carefully during the last two weeks, waiting for new economic data to shed light on the impact Brexit will have on global markets.

On Monday, sovereign 10-year bond yields across the developed world edged up slightly, but remain below where they were before the British vote in June, a sign that markets have recovered from the initial shock of the referendum result but remain cautious about the economic outlook.

Markets are in "kind of a purgatory, somewhere in the middle," said David Vickers, senior portfolio manager at Russell Investments. "We think we've largely bottomed in yields but we don't think we are about to go on the uptrack. We are here to stay for a while."

A testament to this no-man's-land for markets, the price of gold—a well-known haven against risk—inched down on Monday, but remains close to the two-year high it hit in earlier this month.

So far, early business surveys suggest the U.K. economy could take a big hit because of its decision to exit the EU. A poll released Monday by the Confederation of British Industry showed optimism about the general business situation among British industrial companies in July was the lowest since January 2009, despite the firms reporting relatively robust sales in the second quarter of the year.

"The evidence is mounting that the economy has taken a hit from Brexit," said Paul Hollingsworth, analyst at Capital Economics. "But it is still early days and the survey evidence so far could reflect an initial shock factor."

Preliminary surveys of purchasing managers published Friday by research firm Markit Economics Ltd. also showed the British economy contracting in July at its steepest pace since 2009.

The British pound, however, has so far shrugged off the gloom of these early indicators. On Monday, it rose 0.25% against the U.S. dollar.

By contrast, the eurozone economy appears to be emerging largely unscathed from Brexit. The business confidence index published Monday by the Munich-based Ifo Institute for Economic Research showed no sign of German companies being adversely affected in July.

"We cannot speak of an uncertainty shock," said Ralph Solveen, economist at German lender Commerzbank AG.

Meanwhile, Brent crude futures traded at $45.70 a barrel, compared with $50.35 at the start of the month, the latest sign that oil prices are unlikely to come close to their pre-2015 levels soon.

Write to Jon Sindreu at [e-mail]

(END) Dow Jones Newswires

July 25, 2016 07:05 ET (11:05 GMT)

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