European stocks weaken on slowdown concerns

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European stock markets turned lower on Wednesday and government bond prices rose, as traders weighed up fresh signs of a looming economic slowdown.

The regional Stoxx Europe 600 share index fell 0.8 per cent in morning dealings, calling a halt to three days of gains. Germany’s Dax fell 1.2 per cent and the FTSE 100 was 0.5 per cent lower in London.

Those moves followed heavy losses overnight for Wall Street’s main US share indices, after a lacklustre US consumer confidence report fuelled concerns about an economic slowdown.

In Asia, Hong Kong’s Hang Seng share index fell 1.9 per cent while its sub-index of technology shares lost 3.3 per cent.

Central banks have moved to tackle persistently high inflation with aggressive interest rate rises, prompting concerns that tighter policy will curb spending by businesses and households.

“We’ve already had a lot of weak data from the US housing market, we’ve got weak consumer confidence data from around the world because of rising prices, and business investment tends to react to the consumer,” said Trevor Greetham, head of multi-asset at Royal London Asset Management.

Data released on Wednesday showed that Spanish inflation hit a 37-year high in June of 10 per cent, up from 8.5 per cent in May and well above economists’ expectations of 8.7 per cent. German inflation was due to be released later in the session.

In government bond markets, the yield on the 10-year US Treasury note fell 0.05 percentage points to 3.16 per cent as the price of the benchmark debt security rose. Germany’s 10-year Bund yield fell 0.04 percentage points to 1.6 per cent.

Bond yields, which move inversely to prices, tend to rise in tandem with forecasts for interest rates and inflation. But market expectations of a possible recession have prompted a repricing in recent weeks of longer-term interest rate and inflation expectations.

After the Federal Reserve raised its main funds rate by an extra large 0.75 percentage points this month, several of its policymakers argued for a similar-sized increase in July. The European Central Bank, which has experimented with negative interest rates to boost economic activity since 2014, is widely expected to lift its main deposit rate above zero by September.

But futures markets are now tipping the Fed’s benchmark interest rate to climb to 3.5 per cent by early 2023, down from estimates roughly two weeks ago of 3.9 per cent — signalling expectations that central bankers will scale back the extent to which they lift borrowing costs.

The Fed’s current benchmark target range sits at 1.50-1.75 per cent.

“People fear how much demand could fall in this period where central banks are raising rates quite aggressively,” said Nitesh Shah, head of commodities and macroeconomic research for Europe at exchange traded fund provider WisdomTree.

“With higher recession risk, bonds can help your portfolio because you can price some rate cuts in coming years” added Guilhem Savry, head of macro and dynamic allocation at Unigestion.

Elsewhere in markets, Brent crude oil was steady at $117.9 a barrel as worries about falling global demand were overshadowed by forecasts of a supply deficit as western nations ratchet up their restrictions on Russian exports.

Futures trading implied the S&P 500 share index would slip 0.1 per cent lower in early New York dealings, with the tech-heavy Nasdaq 100 also dipping 0.1 per cent.

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