European equities set to end month 3% lower

European stocks are expected to end the month 3% lower.

Europe’s main stock market was set to end the month more than 3 per cent lower, after weeks of choppy trading driven by concerns over inflation and central banks moving away from pandemic-era easy money policies.

The regional Stoxx 600 index opened 0.9 per cent higher on Thursday but was on course to finish September down 3.4 per cent after hitting a record high in the first week of the month. The UK’s FTSE 100 added 0.6 per cent, on course to end the month flat.

The eurozone economy is still recovering from a coronavirus-driven recession in 2020, with consumer activity boosted by high Covid-19 vaccination rates.

But the US Federal Reserve, whose policies affect equity and debt markets worldwide, has signalled it is ready to reduce its $120bn a month of asset purchases that have boosted lending and spending through the pandemic as consumer price inflation hit a 13-year high.

Fed chair Jay Powell, who for much of this year has characterised price pressures as a temporary effect of economies reopening after 2020’s shutdowns, on Wednesday warned that “frustrating” supply chain bottlenecks would persist.

Wall Street stock markets endured their worst day of selling since May on Tuesday, with the Stoxx also closing more than 2.2 per cent lower, rattled by prospects of the US, eurozone and UK central banks moving more aggressively to stamp out price rises.

“We are seeing persistent and broad-based inflation in the US and Europe,” said Tatjana Greil Castro, co-head of public markets at bond investor Muzinich.

Line chart of Bond yields move inversely to prices  showing Key US bond yield spikes as inflation fears rattle markets

Government bonds, which fall in price when expectations of higher interest rates make their fixed interest payments appear less attractive, have endured their worst month since March.

The income yield on the benchmark 10-year US Treasury note, which informs the valuations investors are willing to pay for higher-risk equities, was flat at 1.538 per cent on Thursday but has climbed from around 1.3 per cent just over a week ago.

“It will easily reach 2 per cent, if not a little bit higher,” by the end of the year, Griel Castro said.

Futures markets signalled that the S&P 500 share index would rise 0.7 per cent higher in early New York dealings, while the technology-focused Nasdaq 100 would rise 0.8 per cent.

“We’re staying in the buy-the-dip camp,” said Marija Veitmane, equity strategist at State Street Global Markets, referring to the practice of topping up on shares of strong companies during periods of stock market volatility.

While there was “a lot of talk” about the Fed tapering its monthly purchases of Treasuries and mortgage-backed securities, Veitmane added, “what we will get is a lower addition of liquidity [into markets], not a withdrawal.”

Companies in the US and Europe, having benefited from cheap money during the pandemic, were now “awash with cash”, and able to invest in their businesses which was “exciting for long-term profitability”, Veitmane said.

In currencies, sterling rose 0.14 per cent against the dollar to $1.344 after heavy falls earlier in the week as traders worried about a fuel crisis causing stagflation.

The dollar index, which measures the US currency against six others, hovered close to a one-year high, boosted by expectations of tighter monetary policy from the Fed.

Brent crude, the international oil benchmark, edged up 0.14 per cent to $78.75 a barrel after breaching the $80 mark for the first time in almost three years earlier this week.

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