European shares kicked off June on a subdued note, following a turbulent month for global markets.
The regional Stoxx 600 index lost 0.3 per cent. The FTSE 100 was down 0.3 per cent by the early afternoon in London, while Germany’s Dax made small gains.
Those moves came as fresh data showed that German retail sales slid more than expected in April — falling 5.4 per cent month on month compared with expectations of a 0.2 per cent decline, as consumers contended with rapid price growth. German inflation for May was worse than economists had anticipated, according to figures released on Monday, hitting 8.7 per cent on an annual basis.
The muted declines in Europe on Wednesday also followed a volatile four weeks for global equities, with Wall Street’s S&P 500 finishing the month up 0.01 per cent after debate about US inflation, economic growth and the direction of monetary policy — along with disappointing results for bellwether retailers such as Target and Walmart — drove sharp swings.
Futures contracts tracking Wall Street’s benchmark index added 0.1 per cent, while those tracking the technology-heavy Nasdaq 100 dipped 0.1 per cent.
In the months ahead, investors will watch corporate earnings closely to monitor which companies can weather inflationary pressures, said Roger Lee, head of UK equity strategy at Investec.
“Every company generally claims they have pricing power. Proving it will be interesting and critical for equity investments,” he said, contrasting Target’s difficulties with surplus inventory with the performance of British bootmaker Dr Martens on Wednesday, which saw its share price rise more than 25 per cent after it raised its guidance for the next financial year.
In Asian equity markets, Japan’s Topix rose 1.4 per cent on Wednesday. Hong Kong’s Hang Seng fell 0.6 per cent, as investors weighed the easing of coronavirus restrictions in Shanghai following two months of lockdown against growth concerns. A privately compiled gauge from Caixin on Wednesday showed that activity in China’s manufacturing sector contracted for a third consecutive month.
Government bonds were steadier following a bout of selling in the previous session. The US’s Federal Reserve begins the process of quantitative tightening on Wednesday, reducing its balance sheet by allowing some of its existing bonds to mature without replacing them.
“The scale of QT they’re embarking on is an order apart from the last QT in 2017-2019,” Lee said. “I find it difficult to accept the idea that the market has fully priced this adequately,” adding that Treasury bond yields could reach “significantly higher” than their current level of 2.87 per cent.
Questions about how far central banks will raise interest rates have also intensified after eurozone consumer price growth hit a record high in May, with concerns about inflationary pressures stoked further by EU leaders agreeing a ban on most Russian oil imports.
Markets are poised for the European Central Bank to lift rates in July, with a move into positive territory expected by September. The bank’s main deposit rate stands at minus 0.5 per cent and has been negative since 2014.
The yield on Germany’s 10-year Bund, seen as a proxy for borrowing costs in the bloc, was flat on Wednesday at 1.14 per cent. The yield on the 10-year US Treasury note rose 0.03 percentage points. The policy-sensitive two-year Treasury yield rose 0.05 percentage points to 2.59 per cent.
In currency markets, the dollar index, which measures the greenback against a basket of six currencies, gained 0.2 per cent. International oil benchmark Brent crude rose 1.5 per cent to $117.32 a barrel, having tipped over the $120 threshold for the first time since March earlier in the week.
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