© Reuters. A passerby wearing a protective face mask passes through an electric screen displaying a graph showing the average share of Japan’s Nikkei index, amid the coronavirus (COVID-19) pandemic, in Tokyo, Japan, February 24, 2022. REUTERS/Issei Kato/Files
Written by Tommy Wilkes
LONDON (Reuters) – A stock rally ran out of steam on Wednesday as concerns about the outlook for economic growth and rising inflation dampened sentiment, while the UK’s 9% inflation reading underlined how far higher interest rates could go.
Asian stocks managed to post gains for the fourth consecutive session, but equities in Europe were mixed and Wall Street futures point to a weaker open.
Several analysts have described this week’s sharp rally as a short-term bounce of the kind common during a long downtrend in stocks. Few are willing to predict the end of the sell-off after the first five bruises of the year for risky assets given so much macroeconomic uncertainty.
“Investor sentiment and confidence remain shaken, and as a result, we are likely to see choppy and volatile markets until we have more clarity on the 3Rs – rates, stagnation and risks,” said Mark Heffel, chief investment officer at UBS Global. Wealth management.
By 0810 GMT, the broad euro was down 0.1%, while the 100 was also down 0.1%.
MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.6%, the longest winning streak since February. It rose 0.94% and miners led Australian shares higher by about 1%.
In the currency markets, the British pound was the biggest loser, falling 0.9% to $1.2387 after UK consumer price inflation hit 9% in April, a 40-year high and roughly in line with analyst expectations. The Pound rose sharply this week and some of its decline on Wednesday was attributed to profit taking.
British inflation is now the highest among major economies, but prices are rising rapidly around the world, forcing central banks to launch a series of interest rate increases even in the face of slowing economic growth momentum.
Canadian inflation reading for April is also due later on Wednesday.
And the dollar rose 0.3 percent to 103.61, heading back towards its highest level in two decades, which it recorded last week, while the euro fell by a similar amount to 1.0515 dollars.
Positive data helped the mood in the short term, with the US retail sales meeting expected a strong increase in April and industrial production exceeding expectations.
Data on Wednesday showed the Japanese economy contracted less than expected in the first quarter.
Shanghai is also nearing the end of its prolonged lockdown and China’s vice premier made soothing comments to tech executives in the latest sign of easing pressure.
However, any good news was offset by a reminder from Federal Reserve Chair Jerome Powell that getting inflation under control will require raising interest rates and possibly some pain.
Investors priced US interest rate increases by 50 basis points in June and July and see the benchmark Fed funds rate rise by 3% by early next year.
US Treasury yields were flat on Wednesday and below recent multi-year highs, but the two-year German government bond yield surged to its highest level since December 2011 after more hawkish comments from the central bank. The European Central Bank’s Klaas Knott said on Tuesday that a 50 basis point rate hike in July was possible if inflation had widened.
Commodities rallied with stocks this week as markets found reasons to hold back growth hopes, even though most prices are below recent highs.
On Wednesday, futures rose 1.3% to $113.38 a barrel and futures rose 1.64% to $114.24 a barrel.
S&P Global Ratings (NYSE:) lowered growth forecasts for China, the United States and the eurozone, underlining the weak outlook for the world’s major economies.
“The global economy continues to experience an unusually high number of negative shocks,” said Chief Economist Paul F. Groenewald.
“Two developments changed the overall picture,” he said, referring to Russia’s invasion of Ukraine and inflation, which turned out to be higher, broader and more stable than initially thought.
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