GLOBAL MARKETS-European stocks recover from rate expectations' shift

A combination of higher-than-expected UK inflation data and U.S. retail sales data, as well as hawkish comments from European Central Bank officials, pushed European and U.S. stocks lower on Wednesday, as traders scaled back their expectations for rate cuts. But European stocks indexes rose on Thursday, as markets steadied.

European stocks rose on Thursday as markets steadied after falling the previous day when traders lowered their expectations for major central banks to start cutting interest rates soon. A combination of higher-than-expected UK inflation data and U.S. retail sales data, as well as hawkish comments from European Central Bank officials, pushed European and U.S. stocks lower on Wednesday, as traders scaled back their expectations for rate cuts.

But European stocks indexes rose on Thursday, as markets steadied. At 1248 GMT, the pan-European STOXX 600 was up 0.6% on the day, while Germany's DAX was up 0.7%.

London's FTSE 100 was up 0.3%, recovering from a seven-week low hit on Wednesday. U.S. Treasury yields, which were pushed higher by Wednesday's change in expectations, edged back down on Thursday. The U.S. 2-year yield was at 4.3312%, compared to Wednesday's peak of 4.376%.

Wall Street futures were mixed, with Nasdaq e-minis up 0.9% and S&P 500 e-minis up 0.4%, but Dow Jones futures down 0.2% on the day. Tim Graf, head of macro strategy for EMEA at State Street Global Markets, said that there is "probably still a little bit more to go", in terms of markets reducing their expectations for imminent rate cuts.

"I think that means higher front-end rates and maybe a little bit of a stronger dollar but you're kind of two-thirds of the way there, I would say," he said. During Asian trading, fears about China's economy led to China's blue-chip stocks index hitting its lowest in five years , and the Shanghai Composite Index fell to its lowest since April 2020. Both recovered over the course of the session.

China's economic recovery from COVID has been shakier than many investors expected, with a deepening property crisis, mounting deflationary risks and tepid demand casting a pall over the outlook for this year. The U.S. dollar index was steady at 103.36, having climbed 2% so far in 2024 as investors revised previous expectations that the U.S. Federal Reserve could cut rates as early as March .

The euro was down 0.1% on the day, at $1.08765. Euro zone government bond yields were steady, with the benchmark 10-year German yield up one basis point at 2.28% .

Oil prices were steady, helped by OPEC forecasting relatively strong growth in global oil demand over the next two years, although analysts said that was partly offset by an unexpected build-up in U.S. crude stockpiles and China's struggling economic recovery. The International Energy Agency (IEA) made an upward revision to its 2024 oil demand growth forecast.

Brent crude futures were down 0.1% at $77.81 a barrel , while U.S. West Texas Intermediate crude futures were up 0.1% at $72.63. In the latest rise in geopolitical tensions, Pakistan conducted strikes inside Iran on Thursday, targeting separatist militants, the Pakistani foreign ministry said, two days after Tehran said it attacked Israel-linked militant bases inside Pakistani territory.

State Street Global Markets' Graf said the conflict had not affected broader financial markets.