European stocks dip as investors brace for US rate hike, global slowdown

London — European stocks dipped on Friday and Europe’s benchmark German 10-year bond yield hit its highest since mid-June as investors braced for a US rate hike, while warnings from the World Bank and the International Monetary Fund (IMF) fanned fears of a slowdown.

The World Bank’s chief economist said on Thursday he was worried about a period of low growth and high inflation in the global economy. The IMF said downside risks continue to dominate the global economic outlook, but it is too early to say if there will be a widespread global recession.

Wall Street sold off on Thursday after US economic data gave the Federal Reserve little reason to ease its aggressive rate-hike stance.

The downbeat tone continued during Asian trading, with data showing that China’s property sector had contracted further last month.

As of 8.15am GMT, the MSCI world index, which tracks shares in 47 countries, was down 0.5% on the day and set for its fourth consecutive day of losses.

Europe’s Stoxx 600 was down 1.2% and London’s FTSE 100 edged 0.1% lower. Germany’s DAX was down 1.8%.

Markets priced in a 75% chance of a 75-basis-point (bps) rate hike and a 25% chance of 100 bps when the Fed meets next Wednesday.

In the UK, retail sales fell more than expected, in another sign that the economy is sliding into recession as the cost-of-living crisis squeezes households’ disposable spending.

“We’re now seeing data confirm that the economy is indeed slowing down,” said Axel Rudolph, market analyst at IG Group.

“I expect stocks to head back down to below their March lows. If you are in an environment where you have central banks that aggressively raise rates, historically this has always led to bear markets.”

The pound weakened to a 37-year low against the US dollar.

The US dollar index was up 0.3% at 110.13, still hovering near a 20-year high, and steady against the yen at 143.365.

The yen could hurtle towards three-decade lows before the year-end, according to market analysts and fund managers.

The dollar’s strength pushed China’s offshore yuan past the 7-per-dollar level for the first time in nearly two years.

The euro was a touch lower at $0.9961. Germany’s two-year bond yields hit a fresh 11-year high after the European Central Bank (ECB) vice-president said an economic slowdown in the eurozone would not be enough to control inflation and the bank will have to keep raising interest rates.

Germany’s benchmark 10-year bond was up 3 bps on the day at 1.765% — having touched its highest since mid-June in early trading.

Oil prices edged higher, but were on track for a weekly drop amid fears of a reduction in demand.

Reuters