European shares fell on Friday, following declines in Asian equity markets, as traders assessed signs of persistently high inflation in the US and the prospect of imminent monetary policy tightening.
The regional Stoxx 600 Europe index fell 0.7 per cent in morning dealings and London’s FTSE 100 lost 0.1 per cent. In Hong Kong, the Hang Seng share gauge slipped 0.2 per cent lower, while Japan’s Nikkei 225 lost 1.3 per cent.
Inflation figures on Wednesday revealed that US consumer prices rose by an annual 7 per cent in December, their fastest pace in almost four decades. Separate data on Thursday showed that US wholesale prices rose at an annual clip of 9.7 per cent in December.
Lael Brainard, US president Joe Biden’s nominee for the position of Federal Reserve vice-chair, told a confirmation hearing later on Thursday that “we are taking actions on the monetary policy front that I have confidence will bring inflation down”.
Traders have struggled with how to assess the inflation outlook in recent days, with US and European equities initially rallying after Wednesday’s CPI data in a burst of relief that the 7 per cent annual price surge was not worse.
“The markets are in this period of transition which of course always goes with some doubts,” said Geraldine Sundstrom, a managing director and portfolio manager at Pimco.
“We are moving from a time where inflation was deemed transitory and central banks would remain accommodative as far as the eye could see to a time when it is natural to expect some removal of monetary accommodation, but how much that should be is the big question mark for everyone,” she added.
Wall Street stocks closed Thursday’s session sharply lower, with the technology-heavy Nasdaq Composite falling 2.5 per cent and the broad-based S&P 500 index down 1.4 per cent. In a sign that traders were withdrawing from assets perceived to be higher risk and shifting to investments with more defensive characteristics, the S&P’s utilities and consumer staples sectors were the only two advancers.
Traders expect the US central bank to lift borrowing costs, which affect interest rates around the world, by three to four times in 2022 to about 1 per cent, after dropping these rates close to zero in spring 2020.
In government debt markets, the yield on the US 10-year Treasury note, which moves inversely to its price, added 0.03 percentage points to 1.74 per cent. The yield on the two-year Treasury note, which closely tracks interest rate expectations, also added about 0.03 percentage points to 0.93 per cent.
The 10-year German Bund yield added 0.02 percentage points to minus 0.07 per cent.
In currencies, the dollar index, which measures the greenback against six others, lost 0.1 per cent on Friday.
Signalling that Russian geopolitical tensions were beginning to seep into financial markets, Moscow’s benchmark Moex stock index has fallen more than 2 per cent this week.
In commodities, the price of Brent crude, the oil benchmark, added 0.7 per cent on Friday to $85.05.