LDN - Business

Stocks, euro sputter after stubborn euro zone inflation data

[March 02, 2023] By Nell Mackenzie and Dhara Ranasinghe

LONDON (Reuters) -World stocks sputtered on Thursday, pressured by a pullback in Chinese stocks and higher U.S. 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 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% in February from 8.6% a month earlier on lower energy prices, but still came in above expectations for 8.2% in a Reuters poll of economists.

MSCI's broadest index of world shares dipped 0.2%, hovering near 7-week lows. The STOXX 600 index slid 0.3% and Wall Street's S&P futures were down 0.6%.

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. Profitabilty might not be that fragile, at least, not yet," he said.

Nasdaq futures were off 0.7%, hit by a 5.5% drop in Tesla shares in after-hours trading. The company said it will cut vehicle assembly costs by half in future generations of cars, but Chief Executive Elon Musk did not unveil a much-awaited small, affordable electric vehicle.

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 2-year government bond yield rose to its highest since October 2008.

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The German share price index DAX graph is pictured at the stock exchange in Frankfurt, Germany, February 27, 2023. REUTERS/Staff

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.

“Economic data has surprised to the upside," said Steven Oh, global head of credit and fixed income at PineBridge Investments. Any unexpected result in the data would drive policymakers to be more aggressive, and that's reset market expectations, he said.

"Now the question becomes, have we reset expectations sufficiently and where do we go from here?” he said.

Benchmark 10-year Treasury yields hit a fresh four-month high of 4.034%, while two-year yields also advanced to 4.902%, 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% to 4.75% range, could peak above 5.5%, stood at 53%, compared with 41.5% on Feb. 28, according to CME Fed tool.

In currency markets, the U.S. dollar index, measuring its value against a basket of major peers, gained 0.2% to 104.62.

The euro lost 0.4% to 1.0625 and the pound dipped 0.42%, with hotter-than-expected inflation numbers adding to pressure on the ECB to raise rates.

In the crypto world, shares in Silvergate Capital plunged by as much as 28% after the cryptocurrency-focused bank said it was delaying its annual report and was evaluating its ability to operate as a going concern.

Oil prices were largely steady on Thursday. U.S. crude rose 0.7% to $78.20 a barrel. Brent crude followed, rising 0.6% to $84.77 per barrel at 0945 GMT.

Spot gold was slightly lower at $1,832.73 per ounce. [GOL/]

(Reporting by Nell MackenzieEditing by Tomasz Janowski)

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