Europe midday: Stocks power ahead as investors welcome Fed rate hike

European stocks powered ahead as investors welcomed the Federal Reserve’s first rate hike in nearly a decade and reassurance that the tightening path will be gradual.

At midday, the benchmark Stoxx Europe 600 index was up 2.1%, Germany’s DAX was up 3.4% and France’s CAC 40 was 2.5% higher.

Banks were among the top performers, with the Stoxx 600 index for the sector up 2.9%.

On Wednesday, the US central bank lifted the range for its benchmark interest rate to between 0.25% and 0.5% from 0% to 0.25%, as chairwoman Janet Yellen insisted the increase was part of a “gradual” process and reflective of an economy that is on a path of “sustainable improvement”.

European government bonds also gained ground on the news, with the yield on the 10-year German Bund down four basis points, while yields on peripheral European debt such as Spain and Italy’s 10-year government bonds, also fell. Yields move inversely to prices.

“Ahead of the decision the consensus view was that a 25 basis-point increase was factored in to equity markets, said SpreadCo analyst David Morrison, noting that the key takeaway from the accompanying FOMC statement was that the committee expects economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate.

“This was a change from when the Fed talked about ‘measured’ increases and convinced the markets that the Fed would be cautious going forward and would consider incoming data rather than having a fixed plan in place.

Morrison said the market reaction suggests relief on two counts: firstly that the Fed didn’t flunk it and duck tightening monetary policy. The second is that the Fed is telling the markets that it is upbeat about the outlook for the US economy, and also confident that its 2% inflation target will soon be achieved.

In currency markets, the dollar gained ground against its major rivals after the rate hike, trading up 0.5% versus the pound and the euro and 0.2% higher against the yen.

“If the Fed raises rates by 1% next year – in line with the path implied by the FOMC’s forecasts – the dollar will be significantly stronger by December 2016. In practice, they’ll tighten less, in part because of further dollar strength,” said Societe Generale strategist Kit Juckes.

With investors firmly focused on the Fed’s announcement, softer-than-expected German data came and went with little fuss.

The IFO Institute’s business climate index slipped to 108.7 from 109 the previous month, falling short of analysts’ expectations for a flat reading.

In corporate news, pharmaceuticals giant AstraZeneca was on the front foot after announcing the acquisition of a majority stake in US and Netherlands-based Acerta Pharma in a deal valued at $4bn (£2.7bn).

Standard Chartered was also in the black after it said that HSBC veteran Simon Cooper would be its corporate and institutional banking head.

French oil company Total gained after it named chief executive Patrick Pouyanne as chairman of the board.

Still to come, there is a raft of data due from the US. The Philadelphia Fed survey, current account balance and initial jobless claims are all scheduled for release at 1330 GMT, while leading indicators are at 1500 GMT.