4:00 PM Frankfurt – European markets traded higher despite the Bank of England Governor casting doubts on the recent market rally. Markets across the euro zone traded higher after factory output increase more than expected in December. The euro gained. BoE estimated above-target inflation for prolonged period.
Market sentiment in Europe was positive after the release of factory output data across the euro zone.
Output across the currency union increased 0.7% in December from November on the sustained increase in machinery orders, according to the latest data released by the statistics agency Eurostat.
Output in Germany increased 0.8%, however, the factory output from a year ago declined 2.4% in the currency zone.
Durable and non-durable goods production increased 2% in the month.
In London trading the FTSE 100 index increased 0.3% or 17.3 to 6,356 and in Frankfurt trading the DAX index added 0.8% or 58.1 to 7,718. In Paris, the CAC 40 index gained 0.2% or 8.1 to 3,695.
Market indexes in Madrid and Milan surged as much as 1.9% and all major markets in the European Union traded higher.
Italy sold 6.63 billion euros of bonds, just below its maximum target sale of 6.75 billion euros. The yield on 10-year Italian bonds fell 7 basis points to 4.44% and spread to German bunds narrowed to 277 basis points.
Similar bond yield for Spain increased 9 basis points to 5.23%.
The euro advanced 0.18% to $1.345 and the krona jumped 1.1% against the dollar after the central bank in Sweden left its seven-day repo rate unchanged at 1%.
BoE Estimates Above-Target Inflation
Bank of England estimated inflation to remain above target for a “prolonged time” according to the latest inflation report presented by the Governor Mervyn King.
The pound declined 0.5% to $1.556, the lowest in six months and the UK government 10-year bond rose 10 basis points to 2.2%.
King noted in his report that inflation is higher than estimated in November on weaker pound and higher energy prices. He added, weak productivity growth is increasing cost pressures on businesses.
The BoE estimated 2.3% inflation at the end of its two-year period and also guided a “slow but sustained” recovery.
King also said that the recent market rally and market optimism are not reflected the slow moving economic indicators.
“The underlying data do not seem to be living up to the optimism in financial markets. That may change. Maybe financial markets may be proved right,” said King.
Stocks in Review
Banks were in focus after Societe Generale SA and Storebrand ASA reported earnings.
SocGen declined 3.6% after it reported December quarter loss of 476 million euros compared to 100 million euros profit in the quarter a year ago. The bank wrote down goodwill of 392 million euros.