European shares edge down as traders contemplate inflation outlook

European stocks edged lower on Thursday after a relief rally in the prior session, powered by US inflation data coming in no worse than feared, gave way to questions about how long it would take for surging price rises to moderate.

The Stoxx 600 equity gauge fell 0.1 per cent, having ended Wednesday’s session 0.6 per cent higher in response to a 7 per cent annual gain in US consumer prices that investors calculated did not speed up the Federal Reserve’s timetable for withdrawing its pandemic-era monetary stimulus.

London’s FTSE 100 was flat after rising 0.8 per cent on Wednesday.

Traders continue to expect the US central bank, whose monetary policy decisions affect funding costs and stock market valuations worldwide, to raise its main funds rate three to four times this year to about 1 per cent, after tethering it close to zero from March 2020.

This relatively benign outlook for funding costs is based on assessments that US inflation, driven by rebounding energy prices and bottlenecks in supply chains disrupted by coronavirus, will soon peak.

“People like the comfort blanket of what feels like the mathematical certainty that a 7 per cent inflation rate cannot continue,” said Sunil Krishnan, head of multi-asset funds at Aviva Investors.

But this was preventing investors from “asking the tough questions,” he added, about how far US inflation would fall and the possibility of the Fed needing to raise interest rates beyond what markets expected.

“If we are looking at 3.5 per cent inflation by the end of the year, the Fed will still have a lot of wood to chop,” he said.

“CPI was expected to be bad and therefore the ability to shock was relatively low,” added Deutsche Bank strategist Jim Reid. “Most forecasters think the peak for inflation is sometime soon, but the pace of the glide path is open to debate.”

Wall Street stock markets rose after the inflation report before ending Wednesday’s session with muted gains. In Asia, Hong Kong’s Hang Seng index drifted 0.1 per cent lower on Thursday while the Nikkei 225 in Tokyo lost 1 per cent.

Later on Thursday, economists polled by Reuters expect separate US inflation data to show producer prices, the measure of what businesses pay their suppliers, rose 9.8 per cent in the year to December.

Futures markets implied the blue-chip S&P 500 share index and the top 100 stocks on the technology-focused Nasdaq Composite would trade flat in early New York dealings.

The yield on the 10-year US Treasury note rose by about 0.03 percentage points to 1.75 per cent on Thursday as the price of the benchmark government debt instrument fell.

The dollar index, which measures the US currency against six others, dipped just under 0.3 per cent after dropping to its lowest point since November earlier on Thursday morning.

The euro added 0.3 per cent against the dollar to $1.147. While the European Central Bank has ruled out raising interest rates this year, Fed rate rises are so well priced in to markets that further dollar strength is unlikely, analysts at Citi commented.

“We now arguably approach peak Fed-hawkishness in the near-term,” the Citi team commented in a note to clients. “Risks are now tactically biased toward a stronger [euro].”

Brent crude, the oil benchmark, added 0.2 per cent to $84.87 a barrel.

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