Stocks slip on inflation concerns as oil prices rise further

Strong US and European corporate results helped stock markets initially rebound on Wednesday, but rising crude prices kept inflation concerns alive and trading choppy even as bond yields eased after having touched fresh multiyear highs.

An index of Europe’s 600 biggest stocks rose as much as 0.8% as robust earnings from luxury majors Burberry and Richemont countered pressure from rising yields.

Buoyant reports from United Health Group Inc, Procter & Gamble Co and others also supported initial gains on Wall Street.

But the early gains faded as concerns about rising inflation and higher yields put the market in a holding pattern as investors await next week’s Federal Reserve policy meeting for guidance on the central bank’s plan to tackle inflation.

“The market is still grappling with how do you adjust to higher rates and what are the companies that are impacted by higher rates?” said Jon Maier, chief investment officer at Global X ETFs.

“The market was very excited that maybe the Goldman Sachs numbers (on Tuesday) weren’t so bad. Then reality sunk in.”

MSCI’s all-country world index fell 0.18%, while the broad STOXX Europe 600 index closed up 0.23%.

The Dow Jones Industrial Average fell 0.36%, the S&P 500 slid 0.18% and the Nasdaq Composite dropped 0.18%.

US Treasury yields hit fresh two-year highs and Germany’s 10-year yield broke into positive territory for the first time since May 2019, as investors hike bets that policymakers will curb years of stimulus in order to fight rising asset prices.

The rise above 0% for the bund — the euro zone’s benchmark– marks a turning point for regional debt, reflecting record-high inflation that is being exacerbated by supply chain disruption.

“This inflationary episode is unusually challenging in that it is driven by both strong demand and shortages of supply,” said Guy Foster, chief strategist at wealth manager Brewin Dolphin.

Oil prices hit their highest since 2014 amid an outage on a pipeline from Iraq to Turkey and global political tensions that stoked fears of more persistent inflation and helped prop up the dollar, which hovered near one-week highs.

The market is making interest rate adjustments throughout the major industrialized economies, said Marc Chandler, chief market strategist at Bannockburn Global Forex.

“Those countries that seem to be ahead of the US in the queue of raising grades – Canada, the UK and Norway – have stronger currencies this year against the dollar,” he said.”Other areas like the Euro, Swiss franc are softer on the year.”

The dollar index, which tracks the greenback versus a basket of six currencies, fell 0.21%. The euro rose 0.21%at $1.1349, while the yen was down 0.33% at $114.2300.

Overnight in Asia, MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.4% as tech stocks in particular suffered as they had on Tuesday in Europe and on Wall Street.

Australia’s main stock index shed 1.0%, while Japan’s Nikkei hit a three-month low as worries over new curbs on businesses to halt a record surge in coronavirus cases curbed risk appetite.

The two-year US Treasury yield, which typically moves in step with interest rate expectations, slid 2 basis points to 1.020%.

The yield on 10-year Treasury notes feel 4.3 basis points to 1.825%.

Oil prices rose for a fourth day after a fire on a pipeline from Iraq to Turkey briefly stopped flows, increasing concerns about an already tight short-term supply outlook.

Brent crude futures settled up 93 cents at $88.44 a barrel.

The international benchmark has gained 28% since the beginning of December.

US crude futures rose $1.53 to settle at $86.96 a barrel.

Gold rose more than 1% as a retreat in the dollar and geopolitical tensions surrounding Ukraine burnished safe-haven bullion’s appeal.

US gold futures settled up 1.7% at $1,843.20 an ounce.