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Global shares decline, bond yields slide and dollar rallies amid inflation fears

Published 07/10/2022, 09:05 PM
Updated 07/11/2022, 06:56 PM
© Reuters. FILE PHOTO: People pass by an electronic screen showing Japan's Nikkei share price index inside a conference hall  in Tokyo, Japan June 14, 2022. REUTERS/Issei Kato

By Katanga Johnson

WASHINGTON (Reuters) - World equities and U.S. bond yields fell on Monday as investors prepare for fresh inflation data and corporate earnings that may be seen as potentially influencing the Federal Reserve’s path ahead for interest-rate increases.

The pan-European STOXX 600 index lost 0.50% and MSCI's gauge of stocks across the globe shed 1.17%.

The euro hovered just above parity versus the dollar as the biggest single pipeline carrying Russian gas to Germany entered annual maintenance, with flows expected to stop for 10 days.

Euro zone bond yields fell while long-term inflation expectations dropped below 2% as recession fears deepened after warnings about the possible cut in Russian gas supplies.

Germany's 10-year government bond yield, the euro zone benchmark, fell 5 bps to 1.296%. It hit a five-week low at 1.072% last week.

Underlining the global nature of the inflation challenge, central banks in Canada and New Zealand are expected to tighten policy further this week. [NZ/INT][CA/INT]

Wall Street, which was off to a strong start in July after a brutal first half of the year, further declined as traders fear another round of heavy sell-off if company results fail to meet expectations this month.

The dollar index rose 0.869%, with the euro down 1.2% to $1.0061.

The market mood will be tested by earnings from JPMorgan (NYSE:JPM) and Morgan Stanley (NYSE:MS) on Thursday, with Citigroup (NYSE:C) and Wells Fargo (NYSE:WFC) the day after.

"Not only are people worried that earnings are going to come in weak because of an economic slowdown, but also because of the rise of the U.S. dollar, which creates a headwind for earnings for multinationals," said Robert Pavlik, senior portfolio manager at Dakota Wealth Management.

The Dow Jones Industrial Average fell 0.42%, the S&P 500 lost 1.04% and the Nasdaq Composite dropped 2.02%.

Later in the week, a raft of U.S. economic data - including consumer prices, retail sales and factory output - should provide a glimpse of the extent to which inflation has peaked and the economy has cooled down as the Federal Reserve moves closer to next week's policy meeting, which is expected to culminate in the second straight 75 basis points interest rate hike.

Chris Zaccarelli, chief investment officer at Independent Advisor Alliance in Charlotte, North Carolina, said his position remains cautiously optimistic," but investors' worry about a recession should not be ignored.

"We believe the headwinds to the economy and the market are substantial as inflation remains too high. ... However, we acknowledge that a lot of bad news has already been priced in, with the Nasdaq down and the S&P 500 continuing to decline from all-time highs," Zaccarelli said.

MSCI's broadest index of Asia-Pacific shares outside Japan closed 2.07% lower, while Japan's Nikkei rose 1.11%. Chinese blue chips lost 1.9% after Shanghai discovered a COVID-19 case involving a new subvariant, Omicron BA.5.2.1.

PARITY PARTY

A hawkish Fed, combined with fears of recession, particularly in Europe, has kept the dollar up at 20-year highs against a basket of competitors.

The Japanese yen weakened 0.86% versus the greenback at 137.27 per dollar, while Sterling was last trading at $1.1894, down 1.11% on the day.

Japan's conservative coalition government was projected to have increased its majority in upper house elections on Sunday, two days after the assassination of former prime minister Shinzo Abe.

The euro continued to struggle, recently trading down 1.2% to $1.006, having shed 2.4% last week to hit a two-decade low and major retracement target at $1.0072.

"With little economic relief on the horizon for Europe, and U.S. inflation data likely to mark a new high for the year and keep the Fed hiking aggressively, we think the risks remain skewed in favour of the greenback," said Jonas Goltermann, a senior markets economist at Capital Economics.

"Indeed, we think the EUR/USD rate will break through parity before long, and may well trade some way through that level."

Rising interest rates and a strong dollar have been a headache for non-yielding gold, which was ailing at down 0.5% to $1,733.67 an ounce, having fallen for four weeks in a row. [GOL/]

Oil prices also lost around 4% last week as worries about demand offset supply constraints. [O/R]

© Reuters. FILE PHOTO: A Wall Street sign outside the New York Stock Exchange in New York City, New York, U.S., October 2, 2020. REUTERS/Carlo Allegri//File Photo/File Photo

U.S. crude recently fell 0.97% to $103.77 per barrel and Brent was at $106.78, down 0.22% on the day.[O/R]

Data from China due on Friday is likely to confirm the world's second largest economy contracted sharply in the second quarter amid coronavirus lockdowns.

Latest comments

This just in, there may be inflation! lol
All ready the stock market priced in .. only positive
Buy the rumour, sell the news. If 75pts appears, markets will tank again.
Gold doesn't pay interest!!OMG shock horror. But traditionally it's a hedge against inflation right so should be going up 8%....However they create fake gold out of thin air just like fake dollars. Tic Tok.
News- "Gold is useless and we remind you about it in every unrelated article we have" Banks- "Agree that is why we just shorted have a trillion dollars in derivates in Q1"  Conspiracy theorist- "It actually seems like you are just trying to prop up fiat currency by selling gold you don't have" News- "Lol you hear this guy" Banks-"lol we can't even get coins, what makes you think we can get tin foil hats"
so nothing about yet bank runs
Gingerly lol
Mealt down crash HK STOCK🔥
Just read the piece on Japan's machinery orders slipping. Of course Algos are running the stock up. Last month I thought the FED would pump on bad inflation data, but they let the market dump. On Friday May 20th the DOW was down over 1,100 points. The FED pulled it back to $8.00 in the green at market close. I have no idea what the FED will do this coming week. I do know that I'm not willing to wager my money on it. Maybe our market will follow Japan's lead on Wednesday.
Japan down in month, but up 7.4% you.
Gingerly? The Nikkei is up 2%
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