European equities were heading for the worst week since February after a choppy period of trading in which a US inflation scare and fears of tighter central bank policy battled it out with bullish forecasts on the global economic recovery.
The Stoxx 600 index rose 0.7 per cent on Friday morning, taking the regional benchmark’s fall since Monday to 1 per cent, its biggest weekly slide in more than two months. The UK’s blue-chip FTSE 100 index added 0.7 per cent, heading for a 1.6 per cent loss for the week.
Wall Street futures markets signalled a bright day ahead for tech stocks. Contracts that bet on the direction of the top 100 shares on the tech-heavy Nasdaq Composite index rose 1 per cent. Those on the S&P 500 added 0.6 per cent. The world’s dominant share index hit an all-time high last Friday but is down 2.8 per cent so far this week.
Data on Wednesday showed US inflation rose 4.2 per cent year on year in April, with prices rising at a faster pace than economists had forecast, increasing speculation the Federal Reserve would rein in its crisis-era stimulus of $120bn of monthly bond buying introduced last March.
The inflation report initially sent stocks tumbling worldwide. They recovered on Thursday as the US central bank allayed concerns about an accelerated reduction of its asset purchases.
“We need to be patient, steely-eyed central bankers, and not be head-faked by temporary data surprises,” Fed governor Christopher Waller said in a speech. The central bank, he added, would “maintain an accommodative policy for some time”.
Investors believed “buying into dips is the right strategy because it has served them very well over the past year”, said Sunil Krishnan, head of multi-asset funds at Aviva Investors. “If you believe in what monetary policymakers are saying, then it is the right thing to do.”
But if inflation “is not that far below 3 per cent in a year’s time, you can’t escape the gravitational pull on real purchasing power for too long”, warned Krishnan.
Later on Friday, investors will scrutinise the University of Michigan’s monthly survey of consumer sentiment, which tracks the inflation expectations of households.
US Treasury bonds, which have increased in price over the past two New York sessions as investors shrugged off the inflation jitters, continued to rally on Friday.
The yield on the benchmark 10-year Treasury, which moves inversely to its price, fell 0.03 percentage points to 1.637 per cent.
Kasper Elmgreen, head of equities at Amundi, said he was “cautious” about the stock market in the near term because much of the developed world’s recovery from coronavirus was already baked in to share valuations.
“After we’ve all had our first haircut and our first pint inside, what comes next,” he said, pointing out that China’s early economic rebound from the pandemic was followed by a stock market correction in late March, as traders banked gains and anticipated inflation.
The euro rose 0.4 per cent against the dollar to purchase $1.2123. The dollar index fell 0.3 per cent but remained higher on the week after rallying in the wake of the inflation data. Sterling climbed 0.2 per cent to $1.4084.
Brent crude, the international oil marker, rose 1.4 per cent to $67.98 a barrel.