Spain's IBEX 35 stock index rallied at the open on Wednesday, as the market weighs up whether current valuations are compatible with a much less benign interest rate outlook than expected at the beginning of the year.

In addition, investors are still awaiting Tel Aviv's possible response to the Iranian attacks on Israel over the weekend, which could further stress the situation in the Middle East and, at the same time, lead to higher fuel prices.

These two sources of concern have weighed on the stock market in April - a month in which the IBEX 35 has lost almost 5% to date - especially as the desired scenario of rapid interest rate cuts has moved further away.

New comments from Federal Reserve (Fed) officials confirmed the prospect that the cost of borrowing in the country will fall much less than initially expected this year, if at all, given the surprising strength of the US economy and the persistence of inflation.

Specifically, Fed Chairman Jerome Powell said Tuesday that the U.S. central bank may have to keep interest rates higher for longer than previously thought in the face of "lack of further progress" toward the goal of bringing inflation down to 2%.

According to interest rate futures on LSEG's IRPR tool, markets currently expect the U.S. Federal Reserve (Fed) to cut borrowing costs by a total of 41 points this year, while the European Central Bank (ECB) would cut about 73 points.

In the case of the Fed, investors therefore expect just under two cuts of 25 basis points on average, compared to the six they expected at the beginning of the year.

The ECB, meanwhile, will receive news to analyze on Wednesday, with the publication of the final CPI for March, which according to the average of analysts polled by Reuters will show an increase of 2.4% year-on-year in the general index, unchanged from the provisional figure, and 3.1% in the core (excluding energy and unprocessed food).

"This data would be compatible with the start of rate cuts by the ECB at its 6-June meeting (87% probability), even though the delay and downgrade of Fed rate cut expectations, together with the growing geopolitical risk (warnings from Finland's Rehn), with its potential inflation implications, could limit the amount of ECB rate cuts in 2024. For the time being, we maintain our expectation of 4 cuts in 2024 (vs. 3 from the market)," said Renta 4 analysts in their daily report.

According to IRPR, the odds of an ECB cut in June are over 71%, while futures put the first Fed cut in July, with a 58.7% chance.

At 0750 GMT on Wednesday, Spain's selective Ibex-35 stock market index was up 65.90 points, or 0.63%, to 10,592.80 points, while the FTSE Eurofirst 300 index of large European stocks was up 0.23%.

In the banking sector, Santander rose 1.43%, BBVA gained 1.39%, Caixabank advanced 1.25%, Sabadell gained 1.50%, and Bankinter gained 1.12%.

Unicaja Banco, which pays a dividend this week, fell by 2.03%.

Among the large non-financial stocks, Telefónica fell 0.36%, Inditex advanced 0.32%, Iberdrola gained 0.67%, Cellnex gained 0.91%, and the oil company Repsol lost 0.26%.

Part of the attention was on Naturgy, whose share price was suspended amid speculation about the launch of a takeover bid for the energy group.

Spanish group Criteria said Tuesday that it is in talks with an investment group that has contacted some of Naturgy's main shareholders about a possible shareholding deal in the Spanish energy company.

(Reporting by Tomás Cobos; editing by Benjamín Mejías Valencia)