European markets slip, China eases pandemic measures

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By Elizabeth Howcroft

LONDON (Reuters) - European stock indexes were mostly lower on Monday, finding little support from an easing of China's domestic pandemic restrictions, after market sentiment was dampened by U.S. jobs data on Friday that raised fears of persistent inflation.

Asian shares had been boosted early on Monday by hopes that China's steps to ease its zero-COVID policy would support global growth and increase commodity demand.

More Chinese cities announced an easing of COVID-19 measures on Sunday, after protests against the restrictions last weekend. The news boosted Chinese stocks and pushed the yuan past 7 per dollar. MSCI's broadest index of Asia-Pacific shares outside Japan was up 1.7%.

But the impact on European markets was limited as investors were cautious about the extent of the reopening and remained focused on the outlook for central bank rate hikes. The MSCI world equity index, which tracks shares in 47 countries, was up just 0.3% on the day.

Europe's STOXX 600 was down 0.3%, Germany's DAX was down 0.6% but London's FTSE 100 was up 0.2%.

“I think for an amount of time we won’t know the real definition of zero-COVID because it has been changing and evolving very very quickly in the last two weeks," said Eddie Cheng, head of multi-asset portfolio management at Allspring Global Investment.

The new easing "could add to a stronger demand for raw materials but we also need to see ... how it evolves," Cheng said.

China's "zero-COVID" policies have weighed heavily on the world's second-largest economy. Services activity shrank to six-month lows in November.

Market sentiment in Europe is still under pressure from "some inflation forces," Cheng said, in particular the region's energy crisis.

Euro zone business activity declined for a fifth month in November, final PMI data showed, suggesting the economy was sliding into a mild recession.

November's robust U.S. payrolls report knocked Wall Street on Friday as it challenged hopes for a less aggressive stance by the Federal Reserve.

Futures for the S&P 500 and Nasdaq were down around 0.5% as investors waited for more data to provide clues on the Fed's next move.

The euro was up 0.3% against the dollar, at around $1.05735, while the U.S. dollar index was down 0.1% at 104.31, having recovered after optimism about China's lockdown-easing sent it to five-month lows earlier in the session.

Euro zone government bonds yields slipped, with the benchmark German 10-year yield at 1.837%.

The European Central Bank should raise interest rates by 50 bps on Dec. 15, French central bank chief Francois Villeroy de Galhau said on Sunday, reinforcing expectations for the ECB to slow the pace of monetary tightening after back-to-back 75 bp increases.

Investor attention remains focused on the pace of central banks ending their rate-hiking cycles. The Reserve Bank of Australia meets on Tuesday, and is expected to raise rates by a mere 25 basis points. The Bank of Canada meets on Wednesday and is expected to raise rates by 50 bps.

"We expect that growth will take the place of inflation as the main market focus at some point in the not too distant future," said Geraldine Sundstrom, a portfolio manager at PIMCO, in emailed comments.

"Central bank rhetoric is starting to point in that direction, but we won't know for sure until peak inflation is solidly in the review mirror."

Oil prices rose after OPEC+ nations held their output targets steady.

The Group of Seven price cap on Russian seaborne oil came into force on Monday as the West tries to limit Moscow's ability to finance its war in Ukraine. Russia has said it will not abide by the measure even if it has to cut production.

(Reporting by Elizabeth Howcroft; Editing by Peter Graff and Jane Merriman)


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