European shares moved between small gains and losses on Wednesday, while government bonds were steadier after a sell-off driven by expectations of central banks tightening monetary policy to curb inflation.
The regional Stoxx 600 share index was down 0.2 per cent by mid-morning in London, after opening the session higher. Its sub-index of oil and gas stocks rose 1.7 per cent.
London’s FTSE 100, which has outperformed all major European stock markets year-to-date, added 0.3 per cent — buoyed by its heavy weightings of oil and mining groups.
The yield on the 10-year US Treasury note, which moves inversely to its price, was steady at 2.36 per cent — around its highest since May 2019 — after the benchmark government debt security came under renewed selling pressure in the previous session. Treasury investors are now experiencing their worst month of losses since Donald Trump became US president in 2016.
“In a situation where inflation lasts a bit longer, you do not want to be in bonds, you don’t want to be in cash,” said Randeep Somel, portfolio manager at M&G. “Companies that have stable cash flows and aren’t too affected by rising interest rates or inflation are an investment that’s working well.”
Earlier this week, Fed chair Jay Powell said the central banked needed to move “expeditiously” towards tighter monetary policy after the annual pace of US inflation hit a fresh 40-year high of 7.9 per cent in February.
In Germany, Bundesbank president Joachim Nagel said on Monday that the European Central Bank should raise interest rates this year if the inflation outlook warranted it. Germany’s 10-year Bund yield ticked 0.01 percentage points lower to 0.49 per cent on Wednesday but remained close to its highest point since October 2018.
Prices of UK gilts rose, meanwhile, ahead of chancellor Rishi Sunak’s Spring Statement later in the day, in which he is expected to reveal that the nation’s deficit is at least £20bn smaller than previously anticipated but hold back on using all available funds to tackle a cost-of-living crisis.
The 10-year gilt yield fell 0.04 percentage points to 1.67 per cent, even after data released on Wednesday also showed the annual rate of UK inflation hit a fresh 30-year high of 6.2 per cent in February.
Public finances data released on Tuesday also showed strong tax receipts linked to rising wages and inflated consumer prices.
“The coffers are bigger than expected, so the ability to pay back debt is going to be increased,” Somel said.
In Asia, tech groups traded in Hong Kong rose 2.1 per cent and the broader Hang Seng index added 1.2 per cent as investors took advantage of lower valuations. Chinese equities staged their worst weekly drop since 2008 earlier this month, before top economic official Liu He pledged state support for the economy and financial markets. The Hang Seng remains more than 5 per cent lower for the year.
The Japanese yen hit 121.4 against the US dollar, its latest six-year low, reflecting the Bank of Japan’s caution towards raising interest rates to battle a rare bout of inflation in the Asian nation, in contrast to the Fed’s hawkish policies.
European stocks subdued as traders weigh future monetary policy direction
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