Reduced concerns about U.S. inflation helped drive equities higher on Wednesday and supported the dollar, while bonds fell back after the previous day's rally. Investors took their cue from Tuesday's comments from U.S. Federal Reserve Chairman Alan Greenspan that interest rate rises were still likely to be gradual and that inflation was not a serious near-term worry. They also took some heart from U.S. data which, though showing a higher-than-expected rise in the overall Consumer Price Index (CPI), suggested relatively benign inflation when volatile food and energy prices are stripped out. Financial markets have been skittish about inflation in recent weeks, with worries that a sharp burst might force central banks to raise rates quickly, undermining corporate profits and threatening the bond market with a big sell-off.
"While yesterday's CPI data were not entirely comforting, they failed to validate the more rabid expectations circulating in markets recently," Citigroup said in a research note. Euro zone data on Wednesday showing May consumer prices rising at an annual rate of 2.5 percent, the fastest rate of increase since March 2002, had little impact. Investors were nonetheless expected to focus on a news conference later in the day by European Central Bank President Jean-Claude Trichet.
STOCKS, DOLLAR, BONDS
Relief that U.S. rates probably will not rise too sharply or quickly pushed European shares higher. Bourses were also buoyed by positive corporate news, with French cosmetics group L'Oreal deciding to spend up to 1 billion euros ($1.21 billion) to buy back shares over the next 12 months. French media-to-construction group Bouygues reported a return to a first-quarter net profit, and lifted its sales target for this year. The pan-European blue-chip benchmark was up 0.6 percent and the DJ Euro Stoxx 50 index <.STOXX50E> gained 0.7 percent.
Earlier, Tokyo stocks advanced two percent to end at a seven-week high on relief over the inflation outlook. The Nikkei average <.N225> rose 2.23 percent to end at 11,641.72, its highest close since April 30. The broader TOPIX index <.TOPX> added 1.37 percent to finish at 1,167.09. The dollar rose against major currencies after falling on Wednesday when the inflation expectations weakened prospects that higher interest rates would make dollar assets more attractive. The dollar was up 0.48 percent on the euro on the day at $1.2099 . It was up 0.14 percent on the Japanese yen at 109.61 yen . Most euro zone government bond yields rose as Bund futures gave up some of the previous session's steep gains. "We had such a huge move yesterday that it is natural for the market to pull back, so I would not put too much weight on the (price) fall this morning," said one trader. The two-year Schatz yield was up 1.5 basis points at 2.667 percent. The benchmark 10-year Bund yield rose 3.1 basis points to 4.344 percent.///