European shares climb as bond yields stabilise after Fed rate move

European equities opened sharply in positive territory, carrying forward the bounce from the prior day:

• Eurostoxx up 0.7%
• Germany's DAX added 0.8%
• France's CAC 40 rose 0.5%
• UK FTSE climbed 0.9%
• Spain's IBEX gained 0.7%
• Italy's FTSE MIB advanced 0.7%

The main narrative at the open is that investors are finding some reassurance from the way long-dated bonds responded after the Federal Reserve's decision. The Fed hiked its benchmark rate by 25 basis points to a range of 3.75%-4.00% and kept a hawkish stance, yet 10-year Treasury yields held near the 5% level instead of surging higher.

What exactly makes this important?

Before the Fed meeting, a major concern had been that a further hawkish message would speed up the worldwide bond sell-off. However, what is currently being observed, at least temporarily, is a degree of steadiness in longer-term yields. This is providing equities with space for a relief rally.

A recent decline in oil prices is further boosting market sentiment. This follows Saudi Arabia making extra crude shipments available via Oman, which has alleviated some short-term worries about supply disruptions in the Middle East. Brent crude has fallen almost 2% to around $104, while West Texas Intermediate crude is down more than 1% to trade below $101 on the day.

The blend of these factors is especially beneficial for interest-rate-sensitive and energy-sensitive sectors. Banks, industrial companies and other cyclical stocks had already begun to rebound in the prior session, with names such as Siemens Energy, RWE and Hochtief standing out among the stronger performers in the DAX.

Turning to US futures, they too are indicating slight gains after Wall Street's initial difficulty with the Fed's hawkish tone. S&P 500 futures have risen 0.8% and Nasdaq futures are up 0.9%, contributing to the more positive mood in European markets this morning.

All in all, markets are displaying a more risk-on posture, but this still appears to be a relief bounce rather than a definitive all-clear signal. The critical question going forward is whether long-dated yields can remain well-behaved until the end of the week. The Fed has signalled that additional tightening is still possible, meaning another rise in Treasury yields could soon put this recovery to the test.