Stocks squeeze out slim gains, dollar climbs as inflation soars

European stocks made slim gains on Wednesday, with the dollar strengthening as investors fretted over soaring inflation and the hit on global growth from looming interest rate rises.

Europe’s STOXX 600 index added 0.3 per cent, with bourses in London and Paris climbing 0.2 per cent and 0.4 per cent respectively.

Banks and auto stocks gained, though data showed German retail sales fell by more than expected in April as consumers feel the pinch of higher prices.

Soaring food and energy costs drove euro zone inflation to a record-high 8.1 per cent in May, figures on Tuesday showed, stoking concern about rate rises not just in Europe but globally.

The Bank of Canada is the latest central bank set to hike interest rates, with economists expecting an increase to 1.5 per cent from 1.0 per cent later on Wednesday.

Market players were watching whether attempts to douse inflation by central banks across the world with tighter monetary policy would spark recessions - something that could in turn see rate hikes slow.

“It’s just an incredibly uncertain environment at the moment,” said Mike Bell, a global market strategist at J.P. Morgan Asset Management. “In times like that, it makes sense just to moderate the size of one’s risk positions.”

Investors were also concerned, Bell said, about whether a European Union agreement on an embargo on Russian crude oil imports would see retaliation from Moscow. The ban aims to halt 90 per cent of Russia’s crude imports into the 27-nation bloc by year-end.

Wall Street was set to echo gains in Europe. S&P 500 futures were last up 0.4 per cent, strengthening in London trade.

The MSCI world equity index, which tracks shares in 50 countries, was flat.

Earlier, Shanghai emerged blinking from two months of lockdown but as data showed steep falls in factory activity across Asia from the withering of China’s demand, relief in the region was short-lived.

MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.4 per cent, dragged down by Hong Kong’s Hang Seng index.

Euro zone bond yields dipped in early trade following a surge on Tuesday after the bloc’s inflation data came in much higher than expected.

As worries over global inflation flared anew, the US dollar rose to a two-week high versus the yen, buoyed by higher Treasury yields. The dollar has arrested a three-week slide and hit a two-week high of 129.23 yen.

The dollar index which measures the currency against six major peers, including Japan’s, rose 0.2 per cent to 102.05, extending a 0.4 per cent rally from Tuesday. Gyrations

The US Federal Reserve begins shrinking asset holdings built up during the pandemic on Wednesday. Traders expect it will raise rates by 50 bps at meetings this month and next and they are unsure and increasingly worried about after that.

St. Louis Federal Reserve President James Bullard and New York Fed President John Williams are also due to speak on Wednesday and will be watched for clues on the outlook.