Stocks and the Euro stumble after stubborn inflation data in the Eurozone

LONDON (Reuters) – Global stocks tumbled on Thursday, dragged down by a decline in Chinese stocks and a rise in US yields amid concerns that the Federal Reserve and European Central Bank will continue to raise interest rates to combat soaring inflation.

European stocks fell to a one-month low as more-than-expected eurozone inflation figures justified what is widely expected to be another 50 basis point increase in already high decade-long European Central Bank rates this month.

Consumer price inflation in the 20 countries that share the euro currency fell to 8.5% in February from 8.6% in the previous month due to lower energy prices, but was still higher than the forecast of 8.2% in a Reuters poll of economists.

MSCI’s broadest index of world stocks (.MIWD00000PUS) fell 0.2%, hovering near 7-week lows. The STOXX 600 Index (.STOXX) fell 0.3%, and S&P futures on Wall Street fell 0.6%.

Investors’ enthusiasm about China’s economic reopening faded after Beijing loosened its strict controls over COVID-19 in December, as analysts look for more clues to gauge the pace of economic recovery.

Stock and bond markets in the past weeks have been driven by various factors, said Kevin Gardiner, global investment analyst at Rothschild & Co. The main concern in stocks is the expectation of corporate earnings pressures, while bonds are sensitive to inflation and price expectations.

“In the past few months, stock markets have internalized that despite all these predictions of an imminent collapse in profits, a sharp economic slowdown has not materialized,” he said.

He said that the decline in natural gas prices and the removal of supply chain bottlenecks after the Russian invasion of Ukraine is a neglected development in the capital markets.

“The economic impact of tightening remains a mystery. Profitability may not be that fragile, at least not yet,” he said.

Nasdaq futures fell 0.7%, dragged down by a 5.5% drop in Tesla (TSLA.O) shares in after-hours trading. The company has said it will cut vehicle assembly costs by half in future generations of cars, but CEO Elon Musk has yet to unveil a long-awaited affordable electric minivan.

Overnight, both benchmark government bonds and stocks took a hit, as inflation indicators from Germany and the US reinforced expectations that interest rates would rise and stay there for longer.

The two-year German government bond yield rose to its highest level since October 2008.

In the United States, manufacturing activity contracted for the fourth consecutive month in February, but a measure of raw materials prices increased last month, raising fears of persistent inflation.

“Economic data has surprised the upside,” said Stephen Oh, global head of credit and fixed income at PineBridge Investments. He said any unexpected outcome in the data will prompt policymakers to be more aggressive, and that resets market expectations.

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

Benchmark 10-year Treasury yields reached a four-month high of 4.034%, while the two-year yield also advanced to 4.902%, a 16-year high.

Investors still mostly expect the Federal Reserve to raise interest rates by 25 basis points at its next meeting later this month, but expectations for a larger 50 basis point increase have increased. The probability that the Fed’s policy rate, currently set in a range of 4.5% to 4.75%, could peak above 5.5%, is at 53%, compared to 41.5% on Feb. 28, according to the CME Fed Tool.

In currency markets, the US Dollar Index, which measures its value against a basket of major peers, rose 0.2% to 104.62.

The euro lost 0.4%, to 1.0625, and the pound fell 0.42%, with higher-than-expected inflation figures increasing pressure on the European Central Bank to raise interest rates.

In the crypto world, shares in Silvergate Capital (SI.N) fell as much as 28% after the cryptocurrency-focused bank said it was postponing its annual report and assessing its ability to operate as a going concern.

Oil prices were largely stable on Thursday. US crude rose 0.7 percent to $78.20 a barrel. Brent crude followed, up 0.6%, at $84.77 a barrel at 0945 GMT.

Spot gold was slightly lower at $1,832.73 an ounce.

(Reporting by Neil Mackenzie) Editing by Tomasz Janowski

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