European shares rise, dollar slips as market selloff pauses

By Elizabeth Howcroft

LONDON (Reuters) - European shares opened higher on Tuesday, recovering slightly from last week's 17-month lows as the selloff paused, but major central banks' rate hike plans and global recession risks kept investors cautious.

World stocks have edged higher so far this week, recovering from last week's sharp selloff which saw global equities tumble to their lowest since November 2020 as expectations for central bank policy tightening to combat high inflation prompted investors to ditch risky assets.

At 0750 GMT on Monday, the MSCI world equity index, which tracks shares in 50 countries, was up 0.5% on the day.

Europe's STOXX 600 was up 1% and London's FTSE 100 was up 0.6%.

Still, analysts expect the bounceback to be short-lived. Timothy Graf, head of macro strategy for EMEA at State Street (NYSE:STT) Global Markets, said the move higher was likely a result of markets being oversold in recent weeks and relief that event risks, such as the Bank of Japan and Swiss National Bank meetings, have passed.

“I think it’s a pause in what is still a trend where you have this rising probability of slowing growth, high inflation – stagflation potentially – outcome,” he said.

“Equity markets and the earnings prospects for corporates I don’t think have really taken that on board.”

Earlier in the session, the Reserve Bank of Australia's governor Philip Lowe signalled more rate hike increases and said that inflation was expected to reach 7% by the end of the year.

Germany's BDI industry association slashed its economic forecast for 2022 and said that a halt in Russian gas deliveries would make recession in Germany inevitable.

European bond yields rose, with the benchmark 10-year German yield up 8 basis points on the day at 1.736%.

In currency markets, the euro was up 0.5% at $1.0561, while the U.S. dollar index was down 0.4% on the day at 104.07.

The U.S. 10-year yield was at 3.2882%, down from last week's peak of 3.495% - its highest since 2011 - which came the same day the Fed raised interest rates by a massive 75 basis points.

The Japanese yen, which has fallen sharply in recent months, was steady at around $135.19.

Japan's Prime Minister said that the central bank should maintain its current ultra-loose monetary policy. This makes it an outlier among other major central banks.

Oil prices rose as investors focused on tight supplies of crude and fuel products. Brent crude futures were up 1.1% at $115.38 while U.S. West Texas Intermediate (WTI) crude futures were up 1.9% at $111.63.

Gold was little changed at around $1,838 an ounce.

Bitcoin was at around $21,000, having stabilised slightly since it plunged to as low as $17,592.78 at the weekend. Cryptocurrencies have increasingly become a metric of risk appetite, State Street's Graf said.