LDN - Business

Shares slip, bond yields hit multi-year highs on inflation fears

[February 28, 2023] By Samuel Indyk

LONDON (Reuters) - Global equities slipped and bond yields hit multi-year highs on Tuesday after consumer prices hit a record in France and accelerated in Spain, adding to expectations that major central banks will need to continue tightening policy.

France's European Union-harmonised consumer prices rose to a record 7.2% in February while Spain's EU-harmonised 12-month inflation was 6.1%, up from 5.9% in January and above the 5.5% expectation from analysts polled by Reuters.

The pan-European STOXX 600 index dropped 0.4%, although is still on track for a 1.7% gain this month, its fourth positive month in five.

MSCI's All-World index of global shares fell 0.1%, close to its lowest in almost seven weeks reached on Friday.

The index was set to end the month down almost 3%, erasing some of the gains from January, when share markets had risen on expectations that major central banks were close to the end of their tightening cycle.

Since then a slew of U.S. and euro area economic data has reinforced the view that interest rates will rise further and stay high for longer.

"The Fed is expected to finish hiking rates at about 5.5% by October this year," said Matthias Scheiber, global head of portfolio management for the Systematic Edge team at Allspring. "That's quite a change from the beginning of the year when markets were pricing in a peak rate of 4.8%."

Fed funds futures are fully pricing in a 25 basis point rate rise from the Fed next month, with around a 20% chance of a larger 50 basis point hike, while December 2023 ECB euro short-term rate forwards rose to 3.875%, implying a deposit rate of 3.975% by year-end, from 3.775% on Thursday last week.

MSCI's broadest index of Asia-Pacific shares outside Japan traded 0.4% lower at 511.39, pinned near the eight week low it touched on Monday.

In bond markets, Germany's 10-year yield, the benchmark for the euro area, rose 7 basis points (bps) to 2.66%, its highest since July 2011. Benchmark 10-year yields in France and Spain both hit multi-year highs.

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Traders work at their desks in front of the German share price index, DAX board, at the stock exchange in Frankfurt, Germany, June 24, 2016. REUTERS/Staff/File Photo

Preliminary euro area wide consumer price inflation data for February is due on Thursday, while investors will get more information on the state of the U.S. economy with U.S. ISM manufacturing and services survey data for February due on Wednesday and Friday, respectively.

"It's one thing for the Fed to hike and bring inflation down but what they don't want is a hard landing," Allspring's Scheiber said.

"The ISM data released this week will give us a bit more of a clue on how the U.S. economy is dealing with higher interest rates so far," Scheiber added.

The U.S. 10-year yield rose 3 bps to 3.9473%, having risen over 40 bps in February, its biggest monthly jump since September.

In the currency market, sterling was last trading at $1.2086, up another 0.2%, having jumped 1% on Monday after Britain struck a new trade deal with the European Union, brightening the outlook for the post-Brexit UK economy.

The euro was up 0.1% to $1.0619, after rising 0.6% on Monday.

The dollar index, which measures U.S. currency against six other peers, was flat at 104.64 and was set to snap a four month losing streak, having risen 2.5% in February.

U.S. crude rose 1% to $76.46 per barrel and Brent was at $83.02, up 0.7% on the day. [O/R]

Elsewhere, Chicago wheat futures were hovering near a 17-month low due to rain in parts of the U.S. winter wheat belt and optimism over a Russia-Ukraine export deal. [GRA/]

Gold was at $1,810 an ounce having fallen around 6% in February. [GOL/]

(Reporting by Samuel Indyk in London and Ankur Banerjee in Singapore; Editing by Simon Cameron-Moore and Christina Fincher)

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