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European Shares Rally, Anticipating ECB Rates Move

European markets experienced a rebound on Monday, with government bond yields dropping, as investors awaited a potential interest rate adjustment from the European Central Bank (ECB). Meanwhile, attention remained on inflation concerns, fueled by U.S. jobs data.

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The pan-European STOXX index surged by 0.6% as of 0850 GMT, with U.S. stock futures also registering gains.

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In the bond market, the U.S. 10-year Treasury yield saw a decline of 4 basis points to 4.47%, while German yields, which reached six-month highs last week, also retreated.

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All eyes were on the ECB, widely expected to implement a quarter-point rate cut to 3.75% on Thursday, marking the first significant rate adjustment of this cycle. However, a higher-than-expected reading for euro zone inflation last week tempered expectations for swift rate cuts. Market projections now suggest less than a 60-basis-point easing, indicating potential for two 25-basis point cuts and less than a 50% probability of a third.

Michael Brown, a strategist at broker Pepperstone in London, commented, “There’s a relatively positive risk tone to start the week, which seems like a continuation of the positive momentum seen on Friday, albeit is somewhat surprising given the bumper calendar of event risk coming up.”

China’s factory activity grew at its fastest pace in about two years in May, contributing to the prevailing optimism in markets following Friday’s figures, which indicated that the U.S. Federal Reserve’s preferred measure of inflation held steady in April.

Brown added, “The ECB decision is perhaps the most important event to watch, particularly after last week’s inflation data, which raises the hawkish risk that there is only one more cut this year after a 25bp reduction on Thursday.”

In Asia, stock markets saw gains driven by strong Chinese data, with Japan and South Korea also contributing to the positive sentiment. Indian stocks reached record highs.

Currency markets saw the U.S. dollar start June higher, gaining 0.1% against a basket of peers following its first monthly decline in 2024 in May. The euro remained slightly lower against the dollar at $1.0838.

Emerging markets drew attention, with India’s rupee strengthening and the Mexican peso weakening following exit poll results from general elections in both countries.

Gold held steady at $2,327 an ounce, extending its rally for the fourth consecutive month, aided by central bank purchases and Chinese demand.

Oil prices experienced fluctuations after OPEC+ agreed on Sunday to extend most of its oil output cuts into 2025, with some cuts starting to unwind from October 2024 onwards. Brent crude rose by 0.3% to $81.35 a barrel, while U.S. crude also saw a similar increase to $77.21 per barrel.

(Note: Conversion rate: $1 = 157.1900 yen)

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