© Reuters. A man wearing a protective mask, amid the outbreak of the coronavirus disease (COVID-19), walks through an electronic board displaying charts (top) for the Nikkei index outside a brokerage in Tokyo, Japan, March 10, 2022. REUTERS/Kim Kyung-Hoon
By Sujata Rao
LONDON (Reuters) – European shares fell on Tuesday and Wall Street was expected to start falling as rising oil prices raised fears of accelerating global inflation that could keep the US Federal Reserve and other central banks from raising interest rates.
Markets had shown earlier signs that China’s economic pain could subside amid easing COVID-19 restrictions and focus instead on inflation expectations. Eurozone inflation hit a record high of 8.1% in May, a day after German price growth accelerated to 8.7%. Inflation was last at its highest during the 1973-1974 oil shocks.
Futures fell to two-month highs above $123 a barrel and could rise further, analysts warn, citing Europe’s decision to cut Russian oil imports, rising summer demand in the United States and easing Chinese lockdowns at a time of tight global crude supplies.
“It all depends on inflation now,” said Francois Savary, CIO at Prime Partners, wealth manager in Geneva.
He said stock markets are not out of danger despite rebounding from mid-month lows. This recovery has been fueled by perceptions that inflation may have peaked and declining expectations of a Fed rate hike.
“What happens to the markets depends on whether we see some normalization of inflation in the second half of the year,” Savary said.
German inflation data boosted the case for the European Central Bank’s massive interest rate hike in July and sent German short-term yields to their highest in more than a decade.
Debt-burdened Italy saw 10-year bond yields rise by more than 7 basis points.
In the stock markets, the European stock index was down 0.3% while German stocks lost 0.6%.
US futures slipped 0.45% although the Nasdaq electronic Minis offset some earlier losses to hold steady.
The MSCI global stock index is set to end in May with a small loss, its first monthly decline this year
Just as in Europe, Treasury yields were also on the rise after Monday’s holiday in the US. Ten-year bond yields jumped as much as 10 basis points before easing back to trade 6 basis points higher at 2.81%.
While still 40 basis points below their early May highs, yields are well off their most recent six-week lows.
Some of that momentum stems from comments made by Federal Reserve Governor Christopher Waller who on Monday called for a 50 basis point rate hike until there was a “substantial” drop in inflation.
His comments undermined hopes that a rate hike in September would be halted.
China relaxed corps
The mood was more cheerful in Asia earlier, when China revealed details of policy support, including cash aid for graduate employment and support for offshore listings of internet companies.
China’s official PMI also showed factory activity declined in May but at a slower pace than in April.
This helped Chinese stocks gain 1.6% while the MSCI Asia Pacific Index outside Japan added 0.7%.
News from China lifted the Australian dollar although it later turned lower to trade 0.2% against the US dollar.
“Whether Shanghai can achieve effective and sustainable opening is key,” Bruce Pang, head of macro research and strategy at China Renaissance Securities Hong Kong, said of 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 concerns and a rebound in the US Treasury yield led to a rally from one-month lows, allowing it to rise 0.5%. The euro fell 0.7% against the greenback to $1.0706.
“The dollar rose today also on the back of higher oil prices…and the risk of recession is greater in Europe than in the United States,” said Stuart Cole, chief macroeconomic analyst at Equiti Capital.