Wall Street rallied on Wednesday as a steady US interest rate outlook contrasted with harder expectations of further monetary policy tightening in Europe.
Meanwhile, Brazil's sovereign foreign debt rating moved one step closer towards investment grade status, sparking a rally in its stock and currency markets.
By contrast, European shares were weighed down by inflation news that firmed up expectations of rate increases from the Bank of England and the European Central Bank.
On Wall Street, the S&P 500 index closed up 0.9 per cent, while the Dow Jones Industrial Average gained 0.8 per cent. In the face of further mixed news on the US housing market, Wall Street seemed to draw some confidence from a series of stake-building moves by prominent investors such as Warren Buffett Carl Icahn and Edward Lampert, the hedge fund manager.
In the key data release on Wednesday, US housing starts unexpectedly rose 2.5 per cent last month, above expectations, but permits for future building sank 8.9 per cent to the lowest level since June 1997.
However, Tony Crescenzi, chief bond market strategist at Miller Tabak, said housing starts began the second-quarter above their average for the first-quarter, clearly suggesting that housing would be a much smaller drag on GDP growth during the current quarter.
"Building permits were low in April, but the April figure is best viewed in the context of the first-quarter average, which was unusually high relative to starts," he said.
US Treasuries were largely flat with the yield on the benchmark 10-year note trading unchanged at 4.71 per cent.
In Brazil, the Bovespa stock index rose 2.3 per cent and set a new record close, after Standard & Poors raised its long-term foreign sovereign credit rating one notch, to 'BB+' from 'BB', one step below investment grade status.
The Brazilian real surged 1.5 per cent against the dollar and closed at its strongest level since 2001. S&P also Brazil's long-term local currency rating two notches to BBB from BB+, which is the lowest investment grade rating.
In Europe, investors had to contend with some higher-than-expected inflation numbers for the eurozone which cemented expectations that the European Central Bank would raise its benchmark interest rate from 3.75 per cent by at least 25 basis points. Consumer prices rose 0.6 per cent month-on-month for a 1.9 per cent year-on-year gain, the same annual rate of growth as in March.
"Despite the annual inflation rate remaining below target, a rate rise to 4.0 per cent in June seems almost certain, and is increasingly unlikely to be the last this year," said Simon Wallace, economist at the Centre for Economics and Business Research.
The gilts market was also on the defensive after Mervyn King, Bank of England governor, indicated that another rate increase would probably be needed to help return UK inflation to its 2 per cent target.
On European government bond markets, yields on the 10-year bund fell 1.3 basis points to 4.29 per cent while yields on 10-year gilts were 2 basis points lower at 5.11 percent. On European equity markets, the FTSE Eurofirst 300 index fell 0.16 per cent to 1,581.45.
On commodity markets, US oil prices eased below the $63 a barrel mark on news of a larger-than-expected rise in crude oil and petrol stocks last week.
However, the influential Merrill Lynch oil analyst Francisco Blanch warned the "stars are aligned for another leg up in oil prices".
Mr Blanch raised his forecast for the average WTI crude oil price forecast to $66 a barrel for the third-quarter from $60.50 a barrel. For the fourth-quarter, the firm raised its forecast from $61.50 to $67.50 a barrel.
The analyst added that if the 10 leading members of the Organisation of the Petroleum Exporting Countries failed to ramp up production and global oil demand continued to expand, any minor unexpected disruption in the second half of 2007 could push WTI and/or Brent oil prices temporarily above $80 a barrel.
"Similarly, any unexpected demand event like a weather shock or a major Chinese power shortage could put significant short-term upward pressure on oil prices."
Source : ft.com
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