European stocks up as investors see signs Fed could slow rate rises

European stocks rose in early trading on Tuesday, as investors took confidence from signs that the U.S. Federal Reserve could slow down its rate increases, although concern about China's economy still weighed on Asian markets.

Asian equities struggled to make gains due to uncertainty over whether Xi Jinping's new leadership team would prioritise economic growth. China's onshore yuan finished the domestic session with its weakest close since late 2007.

European stock indexes opened higher, with the STOXX 600 up 0.4% at 0809 GMT.

The MSCI world equity index, which tracks shares in 47 countries, was up 0.1% on the day and MSCI's main European Index hit a five-week high, up 0.8% on the day.

"The proximate cause appears to be some hope that the pace of central bank tightening may start to slow later this year and that's giving some investors cause to be relieved," said Hani Redha, a portfolio manager at Pinebridge Investments.

U.S. business activity contracted for a fourth straight month, data on Monday showed, suggesting that the Fed's rate increases have softened the economy, which in turn raised hopes that the central bank could begin slowing the pace of the hikes.

The expected peak for Fed rates has edged down to around 4.93%, from above 5% early last week.

Economists polled by Reuters said that the central bank should not pause until inflation falls to around half its current level.

Some better-than-expected earnings results also supported European stock market sentiment, with Swiss bank UBS among those beating market expectations. But Europe's largest bank, HSBC, reported a 42% slump in third quarter profit, prompting a 4% fall in its shares.

Tech giants Alphabet and Microsoft report earnings later in the session.

Pinebridge's Redha said that earnings estimates have been edging lower in recent months but that the pace of this has been "fairly modest".

"The potential relief that investors feel in terms of coming towards the end of the hiking cycle, that seems to dominate over the grinding lower of earnings estimates."

The U.S. dollar index was a touch higher on the day, up 0.1% at 112.01.

The euro slipped, down 0.1% at $0.98675. The European Central Bank meets on Thursday and is set to raise rates by 75 basis points.

The British pound was up 0.2% at $1.1309. It recovered from session lows and gilt yields fell sharply on Monday in a sign of investor relief when it was announced that former finance minister Rishi Sunak would be the next prime minister.

Euro zone government bond yields were down, with the benchmark German 10-year yield down 7 bps at 2.272%.

German business morale fell slightly in October but the data still beat analyst estimates.

The data "suggests that at least business sentiment is forming a trough", said ING global head of macro Carsten Brzeski in a client note. "This, however, does not mean that any improvement in the economy is near."

Oil prices were up, although gains were limited by fears about slowing growth in the United States and China.

 

(Reporting by Elizabeth Howcroft)