European stock markets fell on Friday, following a decline on Wall Street overnight, after data showed US inflation had risen to a 40-year high.
The regional Stoxx 600 equity gauge dropped 1 per cent, while the UK’s FTSE 100 slipped 0.8 per cent, as markets priced in rapid US interest rate rises that analysts said may slow the growth of the world’s largest economy.
“The risks are now opening to the downside in terms of economic activity,” said Geraldine Sundstrom, multi-asset portfolio manager at Pimco.
Rising bond yields, meanwhile, increased the opportunity cost of holding equities, Sundstrom added. “That generates a sea of red [in equities] as the market reprices everything.”
US consumer prices climbed 7.5 per cent in the year to January, data on Thursday showed. Money markets by Friday morning were anticipating a rise in the Fed’s main funds rate to almost 1.8 per cent by December, from close to zero currently.
The yield on the benchmark 10-year Treasury note — which moves inversely to the price of the government debt security and underpins mortgage rates and global corporate borrowing costs — rose above 2 per cent on Thursday for the first time since 2019.
Wall Street stocks fell heavily on Thursday, with the technology-heavy Nasdaq Composite closing 2.1 per cent lower as prospects of tighter monetary policy pressured the valuations of more speculative businesses.
Futures markets implied the blue-chip US S&P 500 share index would open 0.6 per cent lower in New York while the top 100 stocks on the Nasdaq would drop 0.8 per cent.
The inflation data “raised the small possibility of the first intermeeting Fed rate hike since 1994, and before that since 1979”, Deutsche Bank strategist Jim Reid said, referring to central banks’ usual policies of making monetary policy decisions at their scheduled meetings.
“The market now prices some risk of an emergency hike before March.”
James Bullard, president of the St Louis Fed and a voting member of the Federal Open Market Committee, told Bloomberg on Thursday that he would like to see the funds rate rise by 1 percentage point by July.
The 10-year Treasury yield declined 0.03 percentage points to just over 2 per cent on Friday. Germany’s equivalent Bund yield fell by the same amount to 0.27 per cent but remained around its highest point since late 2018.
Inflation has soared in the US and Europe in recent months as energy costs rebounded from pandemic-era lows and supply chains remained disrupted by a resurgent demand for goods.
The pressure this has piled on central banks to act has curbed investors’ appetite for fast-growing but highly valued tech shares, with the Nasdaq down more than 9 per cent this year.
European stock markets, with heavier weightings of commodities producers, as well as bank stocks that are seen to benefit from rate rises, have done better. The Stoxx is down about 4 per cent in 2022, while the FTSE 100 has risen 3 per cent.
Few assets gained on Friday, although the dollar index, which measures the US currency against six others, advanced 0.4 per cent as traders bet on higher interest rates. Brent crude, the oil benchmark, rose 0.4 per cent to $91.73 a barrel, close to its highest point since 2014.
In Asia, mainland China’s CSI 300 share index fell 0.8 per cent on Friday. South Korea’s Kospi 200 also closed 0.8 per cent lower.