Stocks, euro sputter after euro zone inflation data
World stocks have sputtered, pressured by a pullback in Chinese stocks and higher US yields amid fears the Federal Reserve and European Central Bank will keep raising interest rates to combat high inflation.
European shares dropped to a one-month low on Thursday as stickier-than expected euro zone inflation numbers justified what is widely expected to be another 50 basis point hike in the European Central Bank's already-decade high rates this month.
Consumer price inflation in the 20 countries sharing the euro currency eased to 8.5 per cent in February from 8.6 per cent a month earlier on lower energy prices, but still came in above expectations for 8.2 per cent in a Reuters poll of economists.
MSCI's broadest index of world shares dipped 0.2 per cent, hovering near seven-week lows. The STOXX 600 index slid 0.3 per cent and Wall Street's S&P futures were down 0.6 per cent.
Investor enthusiasm has faded over China's economic reopening after Beijing dismantled its strict COVID-19 controls in December, as analysts look for more evidence to gauge the pace of economic recovery.
Stock and bond markets in the past weeks have been driven by different factors, said Kevin Gardiner, global investment strategist at Rothschild & Co. The chief concern in stocks is the expectation of pressured corporate profits, while bonds are sensitive to inflation and rate expectations.
"In the last few months, stock markets have been digesting that despite all of these predictions of imminent collapse in profits, a severe economic downturn has not materialised," he said.
Falling natural gas prices and a clearing of supply chain bottlenecks after Russia's invasion of Ukraine is an overlooked development in capital markets, he said.
"The economic impact of tightening remains a puzzle. Profitability might not be that fragile, at least, not yet," he said.
Overnight, both benchmark government bonds and shares had taken a blow as inflation indicators from Germany and the United States reinforced expectations interest rates would go higher and stay there for longer.
Germany's two-year government bond yield rose to its highest since October 2008.
In the United States, manufacturing activity contracted for a fourth straight month in February, but a gauge of prices for raw materials increased last month, stoking concerns that inflation would remain stubborn.
Benchmark 10-year Treasury yields hit a fresh four-month high of 4.034 per cent, while two-year yields also advanced to 4.902 per cent, a fresh 16-year high.
Investors still mostly foresee the Fed raising rates by 25 basis points at its next meeting later this month, but expectations of a larger 50 basis points hike have increased.
The probability that the Fed's policy rate, currently set in the 4.5 per cent to 4.75 per cent range, could peak above 5.5 per cent, stood at 53 per cent, compared with 41.5 per cent on Feb. 28, according to CME Fed tool.
In currency markets, the US dollar index, measuring its value against a basket of major peers, gained 0.2 per cent to 104.62.
The euro lost 0.4 per cent to 1.0625 and the pound dipped 0.42 per cent, with hotter-than-expected inflation numbers adding to pressure on the ECB to raise rates.
Oil prices were largely steady on Thursday. US crude rose 0.7 per cent to $78.20 a barrel. Brent crude followed, rising 0.6 per cent to $84.77 per barrel at 0945 GMT.
Spot gold was slightly lower at $1,832.73 per ounce.