Bonds drop, stocks slide as inflation fears mount

Bloomberg

Stocks and US equity futures dropped, while bonds fell Tuesday as euro-zone inflation accelerated to a fresh all-time high, intensifying the debate at the European Central Bank (ECB) about how rapidly to raise interest rates.
S&P 500 and Nasdaq 100 contracts slipped at least 0.3%. Europe’s Stoxx 600 Index was set to snap four days of gains, retreating from a one-month high. Treasury yields climbed across the curve, joining Monday’s selloff in German bunds and European bonds. The dollar advanced.
Brent crude oil rose above $120 a barrel after the European Union agreed to pursue a partial ban on Russian oil. Higher energy and food costs are keeping upward pressure on prices globally and squeezing consumers. Euro-zone consumer prices jumped 8.1% from a year earlier in May, exceeding the 7.8% median estimate in a Bloomberg survey. The acceleration was driven by food and energy after Russia’s invasion of Ukraine.
Global stocks are on track to end the month with modest gains amid skepticism about whether the market is near a trough and as volatility stays elevated. Fears that central bank rate hikes will induce a recession, stubbornly high inflation and uncertainty around how China will boost its flailing economy are keeping investors watchful.
“It’s very hard to have conviction at the moment,” Mike Bell, global market strategist at JPMorgan Asset Management, said in an interview with Bloomberg Television. “We think it makes sense to be neutral on stocks and pretty neutral on bonds actually.” The possibility that Russia could retaliate to the EU move on oil by disrupting gas flows “would make me be careful about being overweight risk assets at the moment,” he said.
Among individual stock moves in Europe on Tuesday, Deutsche Bank AG slipped after the lender and its asset management unit had their Frankfurt offices raided by police.
In Asian trading, technology stocks underpinned gains in Hong Kong, while China rose as data showed factory activity shrinking at a slower pace and Shanghai eased its Covid lockdown. Equities fell in Japan.
US-listed Chinese stocks gained in New York premarket trading, on track to wipe out their monthly losses as easing in lockdown measures in major cities and better-than-expected economic data reassured investors. Alibaba Group Holding Ltd., JD.com Inc. and Baidu Inc. were higher. Electric carmakers also rose after China announced a 50% cut in the purchase tax for low-emission passenger vehicles.
With rate hikes in full swing in the US and the UK, the ECB is preparing to lift borrowing costs for the first time in more than a decade to combat the 19-member currency bloc’s unprecedented price spike.
In the US, Federal Reserve Governor Christopher Waller said he wants to keep raising interest rates in half-percentage point steps until inflation is easing back toward the central bank’s goal.
Meanwhile, President Joe Biden will hold a rare Oval office meeting on Tuesday with Fed Chair Jerome Powell amid the highest inflation in decades and ahead of US payroll numbers later this week.
“This time, the Fed’s tightening cycle will be longer, and policy rates and bond yields will have to go higher than markets currently expect,” Franklin Templeton Fixed Income Chief Investment Officer Sonal Desai said in a note. “The corresponding risk to asset prices and economic growth is greater than many like to admit.”
Elsewhere, Bitcoin was back above $31,000 as investors and strategists said the digital currency is showing signs of
bottoming out.