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World equities and US bond yields fell on Monday as investors braced for a US inflation report that could force another super-sized hike in interest rates, with policymakers battling rising prices while being wary of the threat of recession.
The pan-European STOXX 600 index lost 0.53% and MSCI’s gauge of stocks across the globe shed 1.25%.
The euro hovered just above parity versus the dollar as the biggest single pipeline carrying Russian gas to Germany entered annual maintenance, with flows expected to stop for 10 days.
Euro zone bond yields fell while long-term inflation expectations dropped below 2% as recession fears deepened after warnings about the possible cut in Russian gas supplies.
Germany’s 10-year government bond yield, the euro zone benchmark, fell 5 bps to 1.296%. It hit a 5-week low at 1.072% last week.
Underlining the global nature of the inflation challenge, central banks in Canada and New Zealand are expected to tighten policy further this week.
Wall Street, which was off to a strong start in July after a brutal first half of the year, opened lower as traders fear another round of heavy selloff if company results fail to meet expectations this month.
The dollar index rose 0.728%, with the euro down 0.93% to $1.0088.
The market mood will be tested by earnings from JPMorgan and Morgan Stanley on Thursday, with Citigroup and Wells Fargo the day after.
“Not only are people worried that earnings are going to come in weak because of an economic slowdown, but also because of the rise of the U.S. dollar which creates a headwind for earnings for multinationals,” said Robert Pavlik, senior portfolio manager at Dakota Wealth Management.
The Dow Jones Industrial Average fell 0.37% while the S&P 500 lost 0.98%.
The Nasdaq Composite dropped 1.75%.
Another hurdle will be Wednesday’s U.S. consumer price report, in which markets see headline inflation accelerating further to 8.8% but a slight slowdown in the core measure to 5.8%.
An early reading on consumer inflation expectations this week will also have the close attention of the Fed.
“Unexpected weakness in these releases will be required to dislodge expectations for a 75 bps July 27 Fed rate rise, which lifted from about 71 bps to 74 bps post the payrolls report,” said Ray Attrill, head of FX strategy at NAB.
MSCI’s broadest index of Asia-Pacific shares outside Japan closed 2.05% lower, while Japan’s Nikkei rose 1.11%. Chinese blue chips lost 1.9% after Shanghai discovered a COVID-19 case involving a new subvariant, Omicron BA.5.2.1.
A hawkish Fed, combined with fears of recession, particularly in Europe, has kept the dollar up at 20-year highs against a basket of competitors.
The Japanese yen weakened 0.90% versus the greenback at 137.34 per dollar, while sterling was last trading at $1.1889, down 1.15% on the day.
Japan’s conservative coalition government was projected to have increased its majority in upper house elections on Sunday, two days after the assassination of former prime minister Shinzo Abe.
The euro continued to struggle, recently trading down 0.95% to $1.0086, having shed 2.4% last week to hit a two-decade low and major retracement target at $1.0072.
“With little economic relief on the horizon for Europe, and US inflation data likely to mark a new high for the year and keep the Fed hiking aggressively, we think the risks remain skewed in favour of the greenback,” said Jonas Goltermann, a senior markets economist at Capital Economics.
“Indeed, we think the EUR/USD rate will break through parity before long, and may well trade some way through that level.” Rising interest rates and a strong dollar have been a headache for non-yielding gold, which was ailing at $1,738.19 an ounce, having fallen for four weeks in a row. Oil prices also lost around 4% last week as worries about demand offset supply constraints.
US crude recently fell 2.24% to $102.44 per barrel and Brent was at $105.05, down 1.84% on the day.
Data from China due on Friday is likely to confirm the world’s second largest economy contracted sharply in the second quarter amid coronavirus lockdowns. European stock markets slumped at the open on Monday after heavy falls across much of Asia on China growth concerns, according to traders. London’s benchmark FTSE 100 index dropped 1.3 per cent to 7,099.73 points.
In the eurozone, Frankfurt’s DAX index retreated 1.8 per cent to 12,778.39 points and the Paris CAC 40 shed 2.0 percent to 5,913.80.
The market is largely pricing in a 75-basis-point rate increase later in July, although concerns about the pace of future hikes have grown after a stronger-than-expected jobs report on Friday.
The report, which signaled a still strong labor market, helped alleviate some fears about an immediate recession, but added to worries about more aggressive monetary policy tightening by the Fed to stamp out soaring inflation.