European stocks made a muted start to the week, as traders looked ahead to a wave of corporate earnings reports that would cast further light on the health of the global economy.
The regional Stoxx 600 added 0.2 per cent in early dealings on Monday, Germany’s Dax index was flat and the FTSE 100 added 0.3 per cent. In Asia, Japan’s Topix index slipped 1 per cent, while Hong Kong’s Hang Seng lost 0.3 per cent.
Traders will pay close attention to any evidence of companies struggling with higher prices and rising borrowing costs as more corporate earnings reports are announced this week. Bank of America will report on Monday, after peers JPMorgan Chase and Goldman Sachs reported declining profits on Friday.
On Wall Street, the broad S&P 500 lost 2.3 per cent on Friday and the tech-heavy Nasdaq Composite lost 3.1 per cent after a survey of inflation expectations sparked fresh concerns about the Federal Reserve raising interest rates further into a slowing economy.
The University of Michigan’s monthly survey of US consumers showed Americans expect inflation to remain high in the year ahead, with expectations for price rises over the next 12 months increasing from 4.7 per cent last month to 5.1 per cent this month.
Expectations of higher inflation spark concern among policymakers that workers will demand higher wages, exacerbating price rises. This led investors to anticipate further aggressive interest rate rises from the Fed, making borrowing more expensive for companies and weighing on stock prices.
Stock futures tracking the S&P 500 and Nasdaq 100 both rose 0.8 per cent on Monday morning, pointing to a more upbeat start to the week on Wall Street.
Elsewhere, fresh data on Wednesday from the UK are expected to show another rise in headline inflation, with economists pricing a year-on-year rise of 10 per cent in the consumer price index data, up from 9.9 per cent in the previous month.
A higher CPI reading would add a fresh challenge for UK government bond markets.
Gilts rallied on Monday after signs of fresh action from new UK chancellor Jeremy Hunt to calm markets. He will set out plans at 11am to tackle the government’s deficit, with expectations that further tax measures in the UK’s “mini” Budget will be axed.
As gilt prices rose, 10-year yields fell 0.25 percentage points to 4.076 per cent, while 30-year gilt yields dropped 0.29 percentage points to trade at 4.49 per cent.
This came despite the Bank of England ending its bond-buying programme to support UK pension funds on Friday and governor Andrew Bailey signalling over the weekend that the bank will raise rates more aggressively to tackle inflation.
“Market functioning is impaired and the BoE might still have to step in to provide calm,” warned analysts at ING. “Barring this, sustaining gains below 4% for [10-year] gilt yields is a pipe dream.”
The pound rose 0.8 per cent in early trading to trade at $1.260, after falling 1.4 per cent on Friday as markets deemed as insufficient the decision by UK prime minister Liz Truss to sack chancellor Kwasi Kwarteng and U-turn on plans to cut corporate taxes. Against the euro, sterling was up 0.7 per cent at 86.2p
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