Global stocks lower as inflation and rates weigh on sentiment

London — Global stocks were poised to end the week lower on Friday as investors bet on interest rates remaining higher for longer to quell stubborn inflation, helping to lift the dollar and send oil tumbling.

Eurozone government bond yields fell on news that German business activity slowed notably in June, while French business activity contracted for the first time in five months.

There was also worrying economic news in Asia with Japan’s core consumer inflation exceeding forecasts in May.

Gold steadied after trading near a three-month low and was set for its biggest weekly drop since February as the greenback was buoyed by hints from US Federal Reserve chief Jerome Powell of more rate hikes to come.

The MSCI All Country stock index was down 0.38% at 673.66 points, and off 1.6% for the week, though still up 11.5% for the year.

“We are probably close to peak terminal interest rates for the Federal Reserve and Bank of England, but there is a feeling that central banks are prepared to risk a recession to try to get core prices lower,” said Mike Hewson, chief markets strategist at CMC Markets.

“The idea that we get rate cuts in 2024 is starting to give in to the realisation that we are in for a much longer period of rates at current levels, and that is causing a revaluation of stock markets,” Hewson said.

In Europe, the Stoxx 600 index was down slightly and set to end the week lower.

With a lack of stimulus for China’s sputtering recovery, recent unexpected hikes in Australia and Canada, and the Federal Reserve’s forecast of two more rate hikes, the growth fears are global.

“Central bankers are saying they have a very strong willingness to tame inflation and markets are believing this,” said Kevin Thozet, a member of the investment committee at Carmignac.

Investors, however, should keep a cool head because economic growth was not falling off a cliff, disinflation was on its way, long-term bond yields were behaving well, and central banks are near the end of their rate tightening cycle, Thozet said.

S&P 500 futures were down 0.4%.

Oil down, dollar up 

Oil prices fell for a second straight session and were headed for a weekly decline of more than 3% as a more hawkish tone from central banks cast a cloud over demand. A rising dollar also makes the commodity more expensive for some customers.

Brent oil futures were down 1.6% $72.95 a barrel, while US West Texas Intermediate (WTI) crude futures were down 1.8%, at $68.26.

The US dollar index rose 0.59% to 102.99 and was on track for a weekly gain, reversing three straight weeks of losses as it drew support from growing risk aversion in markets.

The pound, still digesting news of Thursday’s bigger-than-expected 50 basis points rate hike from the Bank of England, fell 0.31% to $1.2709 and was on track for a weekly loss of nearly 1%, snapping three straight weeks of gains.

Elsewhere, the euro fell 0.8% to $1.0869.

In Asian markets, the MSCI’s broadest index of Asia-Pacific shares outside Japan lost 1.2% and is down more than 4% for the week, its worst in nine months.

Japan’s Nikkei fell 1.45% and was set to snap a 10-week winning streak with a 2.7% weekly drop.

In bonds, US Treasuries were steady after being sold when Fed chair Jerome Powell reiterated on Thursday that further rate hikes are likely. Two-year Treasury yields were slightly weaker at 4.75% and 10-year yields at 3.73%.

Gold was trading at $1,917 an ounce, up 0.2% on the day.

Wheat futures took a breather after surging 20% in two weeks as traders braced for Russia to quit a deal guaranteeing the safe passage of grain over the Black Sea.

Reuters