European shares traded higher on Wednesday driven by optimism over the possibility of the Federal Reserve ending its rate hikes and the potential for further economic stimulus in China. The positive sentiment came after US Federal Reserve Chairman Jerome Powell indicated that the central bank could pause its interest rate hikes easing concerns about higher borrowing costs for European companies.
Investors also found encouragement from signs that China may introduce new measures to boost its economy. China's State Council said on Tuesday that it would adopt a more proactive fiscal policy stance to support growth sparking hope that Beijing would implement new measures to stimulate the Chinese economy. The news along with positive expectations for progress in the ongoing trade negotiations between the US and China lifted investor confidence and led to gains in European stock markets.
The pan-European STOXX 600 index rose by 0.6 percent with most sectors in positive territory. Germany's DAX surged by more than 1 percent while France's CAC 40 and Britain's FTSE 100 also recorded gains. The positive momentum continued across major European markets including Italy Spain and Switzerland.
Bank shares were among the top performers with the European banking index rising by 0.7 percent. Deutsche Bank gained 3 percent while Commerzbank and Societe Generale also saw notable increases. A pause in US interest rate hikes would reduce borrowing costs and alleviate some of the pressure on European banks which have been grappling with low interest rates and a challenging economic environment.
The positive sentiment spilled over to other sectors as well. Automakers technology companies and industrial firms all posted gains. Volkswagen BMW and Daimler the three big German automakers saw their shares rise. In the technology sector Infineon ASML Holding and SAP also recorded gains.
The positive mood in the markets extends beyond Europe. Asian shares also advanced with Chinese markets leading the gains. The Shanghai Composite and the blue-chip CSI300 index both surged by more than 1 percent. The upbeat sentiment in Asia was supported by reports that China's top trade negotiator Vice Premier Liu He will travel to Washington in late January for another round of talks with US officials. Investors took these developments as a positive sign that progress is being made towards resolving the ongoing trade dispute between the two economic giants.
In the midst of this positive market sentiment investors should remain cautious. While the possibility of the Federal Reserve pausing its rate hikes and the potential for China to introduce new stimulus measures are encouraging there are still risks and uncertainties in the global economy. The ongoing trade tensions between the US and China Brexit uncertainty and geopolitical conflicts could all impact market stability and investor confidence.
