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Markets looked past signs that China's economic pain might be
abating amid easing COVID-19 curbs and focused instead on the
inflation outlook. Euro zone inflation hit a record high 8.1% in
May, a day after German price growth accelerated to 8.7%.
Inflation was last this high during the 1973/74 oil shocks .
Brent crude futures dashed to two-month highs above $123 a
barrel and could rise further, analysts warn, citing Europe's
decision to slash Russian oil imports, high U.S. summer demand
and the easing of Chinese lockdowns at a time of tight global
crude supply.
"It all depends on inflation now," said Francois Savary, CIO of
Prime Partners, a wealth manager in Geneva.
He said stock markets were not out of the woods despite a
rebound from mid-month troughs. That rebound was spurred by
perceptions that inflation may have peaked and a pullback in Fed
rate hike expectations.
"What happens to markets depends on whether we see some
normalisation in inflation in the second half of the year,"
Savary said.
The German inflation data strengthened the case for an outsized
European Central Bank rate hike in July and sent short-dated
German yields to the highest in more than a decade.
Highly indebted Italy saw 10-year yields spike more than 7 basis
points..
On stock markets, a pan-European equity index slipped 0.3% while
German shares lost 0.6%.
Futures for the U.S. S&P 500 slipped 0.45% though Nasdaq e-minis
recouped some earlier losses to stand flat.
MSCI's global stock index is set to end May with a small loss,
its first monthly fall this year
Just like in Europe, Treasury yields too were on the rise, after
Monday's U.S. public holiday. Ten-year yields jumped as much as
10 basis points before easing to trade 6 bps higher at 2.81%.
While still 40 bps below their early-May highs, yields have
moved away from six-week lows hit recently.
Some of that momentum stems from comments by Fed Governor
Christopher Waller who on Monday advocated 50 basis-point rate
rises until there was a "substantial" reduction in inflation.
His comments dampened hopes of a rate hike pause in September.
CHINA CURBS EASED
The mood was more cheerful in Asia earlier, when China unveiled
policy support details, including cash handouts for hiring
graduates and support for internet companies' offshore listings.
China's official PMI also showed factory activity declined in
May but at a slower pace than in April.
That helped Chinese blue chip shares rise 1.6% while MSCI's
index of Asian shares outside Japan was up 0.7%.
The news from China lifted the Australian dollar although it
later turned lower to trade 0.2% down against the U.S. dollar.
"Whether Shanghai could deliver an effective and sustained
opening up is key," Bruce Pang, head of macro and strategy
research at China Renaissance Securities Hong Kong, said about
the easing of COVID-related measures.
However, with Shanghai residents able to resume driving from
Wednesday, oil prices may get another boost, analysts warn.
Such worries and the U.S. Treasury yield bounce lifted the
dollar index from one-month lows, allowing it to rise 0.5%. The
euro slipped 0.7% against the U.S. currency to $1.0706.
"The dollar has also advanced today on back of higher oil
prices...and the risk of a recession is seen as greater in
Europe than in the U.S.," Stuart Cole, chief macro strategist at
Equiti Capital, said.
(Reporting by Sujata Rao; Additional reporting by Tom Westbrook
and Xie Yu; Editing by Edmund Klamann and Tomasz Janowski)
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