European stocks drop, hawkish Fed put traders in risk-off mood

BLOOMBERG

European equities fell, tracking markets lower in Asia, as  concern about local government debt in China and hawkish language from a US central banker put traders in a risk-off mood.  The Stoxx 600 index dropped 0.8%, snapping two days of gains and trimming its fourth weekly advance in five. US equity futures edged lower and the 10-year Treasury yield near 4%. The British pound led gains among G-10 currencies against the dollar after the strongest quarterly growth in more than a year.
Markets were fragile after San Francisco Reserve Bank President Mary Daly said the Fed still has “more work to do” to combat rising prices, damping the impact of broadly positive inflation data. In China, the government moved to manage local government debt, a key threat to the nation’s financial stability, while property developer Country Garden Holdings Co predicted a multibillion-dollar loss for the first half of this year. The MSCI Asia Pacific Index dropped to the lowest level in a month.
“There may be other accidents waiting to happen as a result of sharply higher rates that we just haven’t seen come through yet,” said Richard Flax, chief investment officer at European digital wealth manager Moneyfarm. “Policymakers seem to be trying to signal to investors that they may be too optimistic to be looking for early rate cuts.”
The week has seen a marked move into haven assets and out of stocks, according to Bank of America Corp strategists. Cash funds attracted $20.5 billion of inflows, while investors poured $6.9 billion into bonds in the week through August 9, according to Bank of America, citing data from EPFR Global. In the meantime, US stocks had their first outflow in three weeks at $1.6 billion.
In currencies, the Bloomberg Dollar Spot Index was flat on Friday. The greenback is set for a fourth week of gains, the longest such streak since February.  “Our view that USD upside is likely limited still holds,” said Christopher Wong, FX strategist at Oversea Chinese Banking Corp.
The point of inflection “could come when the market narrative shifts into trading more rate cuts. And it could be several months out, dependent on how data pans out,” Wong added. In commodities, oil was on track to end the week little changed, after touching the highest since November in recent days, as the International Energy Agency’s monthly snapshot pointed to a robust market.
European stocks drop for first time on policy risk
European stocks declined for the first time in three days as investors weighed the possibility of hawkish-for-longer central banks against optimism around cooling inflation.
The Stoxx 600 Index was down 0.4% in London, following subdued trading in US stocks overnight after hawkish comments from Federal Reserve Bank of San Francisco President Mary Daly.
While data showed core inflation rose only modestly, Daly said in an interview on Yahoo! Finance that the central bank had more work to do to tame price pressures. Miners and energy sectors were among the biggest decliners, while financial services outperformed.  Telecom Italia SpA rose after KKR & Co signed a memorandum of understanding with Italy to include the government in its €23 billion ($25.3 billion) bid for the company.