Global stocks rebound after strong data from China

World stocks rebounded on Wednesday after China’s manufacturing activity expanded at the fastest pace in more than a decade, while stronger-than-expected inflation numbers across the eurozone battered government bonds.

Inflation data from German regions, a day after February numbers showed price pressures surged more than expected across France and Spain, stoked fears that the European Central Bank (ECB) would need to raise rates further.

Germany’s two-year government bond yield, which is highly sensitive to changes in interest rate expectations, rose to its highest since October 2008 at around 3.20%, and was last up 8 basis points on the day. Bond yields rise as prices fall.

“The surprises in January inflation releases have challenged hopes for a smooth return to target inflation,” said Bruno Schneller, an MD at INVICO Asset Management.

Persistent inflation might compel central banks to raise rates further to prevent further economic damage, he added. “Consequently, the risk of policy-driven recessions could rise.”

Two-year Treasury yields, a guide to short-term US rate expectations, were close to four-month highs, but at 4.85% are below a November peak around 4.88%.

The next flush of economic indicators are likely to be crucial as markets gauge whether future rate hikes are sufficiently priced in now.

China’s factories roar

Stock markets looked beyond Europe, though, cheered by numbers from China’s factory sector, which in February grew at the fastest pace in more than a decade (an outlier in Asia, where manufacturing growth has stalled).

The country’s official manufacturing purchasing managers’ index stood at 52.6 last month up from 50.1 in January and was well ahead of analysts’ forecast for 50.5, giving investors hope that China’s recovery can offset a global slowdown.

MSCI’s broadest index of Asia-Pacific shares outside Japan jumped 2.2% earlier, leaving a two-month low behind.

The index provider’s broader world stock offering last rose 0.4%. European stocks followed suit, with the continent-wide Stoxx 600 rising 0.1% by 9.55am GMT, kicking off the month on steady ground following a solid start to the year.

A flurry of earnings had Nivea maker Beiersdorf forecasting slower sales growth after a bumper 2022, while logistics group Kuehne+Nagel reported a 43% drop in fourth-quarter operating profit and Just Eat swung to a small 2022 core profit.

US stocks were expected to reverse a downward week with S&P futures up 0.2%.

In currency markets, the dollar’s February gains seem to have run out of steam and European and Asia-Pacific currencies advanced on the strength of the Chinese data.

The pound and euro both were last up 0.4% and 0.7% against the dollar respectively.

Geopolitics also kept nerves elevated in the background as US President Joe Biden’s visit to Kyiv and Russian President Vladimir Putin’s abandonment of the last remaining nuclear arms control treaty with the US signalled a hardening of positions.

China, which indicated support for Russia by sending its top diplomat to Moscow last week, has issued a call for peace, though it has been met with scepticism, and Washington has said it is concerned that China could send arms to Russia.

“Should Beijing send Russia arms, it risks a rapid geopolitical breaking of the world economy,” said Rabobank’s research head, Jan Lambregts. “Markets have not even begun to contemplate what this might mean.”