European and Asian stocks fell on Monday as investors waited for the US Federal Reserve to deliver another extra-large rate hike to tame inflation.
The regional stock index Stoxx Europe 600 fell 0.2 percent in early trade, while London’s FTSE 100 fell 0.3 percent. Hong Kong’s Hang Seng stock index fell 0.5 percent and Japan’s Nikkei 225 lost 0.8 percent.
Market sentiment in recent weeks has vacillated between fears of an economic slowdown hurting corporate earnings and hopes that weaker demand will quell sweltering inflation and lure central banks into more supportive monetary policy.
“Economy weakness is spreading across the board and demand is falling due to inflationary pressures,” said Neil Birrell, chief investment officer at Premier Miton Investors.
“But bad news can be good news in very macro-driven markets and sentiment has become incredibly volatile,” he added. “You can come up with an argument that’s bullish or bearish on almost any asset class.”
The Fed is widely expected to hike its main interest rate by 0.75 percentage point for the second straight month this week, which would take the federal funds rate to a range of 2.25 percent to 2.5 percent.
The annual rate of US inflation rose to 9.1 percent last month. But signs of a slowdown in the housing market and a fall in consumer spending have started to emerge. Futures markets are tipping the Fed to hike rates to just under 3.4 percent by next February before starting to cut again.
Wall Street’s S&P 500 stock index closed 0.9 percent lower on Friday, down 17 percent for the year after disappointing business surveys for the US and Europe clouded the economic outlook.
Futures markets indicated the S&P 500 would fall another 0.2 percent in early New York trade on Monday.
In Europe, a Purchasing Managers’ Index released on Friday showed business activity contracted after inflation hit record highs and Russia stoked fears about energy security by cutting gas supplies.
Oil slipped on Monday, with Brent crude falling 1.2 percent to $102.02 a barrel. The Euro traded steadily against the Dollar buying $1.02.
The European Central Bank also hiked its main interest rate last week for the first time in 11 years, adding to the stress in Italian bond markets.
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German government bonds fell after a rally late last week as traders looked to risk-free assets to protect against economic uncertainty.
The yield on Germany’s 10-year bond, a barometer of the cost of debt in the euro zone, rose 0.02 percentage point to 1 percent as the bond’s price fell.
Italy’s equivalent bond yield held steady at 3.38 percent, although the premium investors charged for lending to Italy over Germany, a measure of financial stress closely monitored by the ECB, remained at an elevated 2.36 percentage points.
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