European equities traded cautiously ahead of US inflation data later in the week that may determine the future direction of central banks’ monetary policies.
The Stoxx 600, which hit an all-time high on Friday, was flat in early dealings. In London, the FTSE 100 added 0.2 per cent.
Economists surveyed by Bloomberg expect US data released on Thursday to show the year-over-year inflation rate jumped to 4.7 per cent in May, following an unexpectedly strong consumer prices report in April.
The Federal Reserve, the world’s most influential central bank, views strong inflation as a temporary effect of industries reopening after last year’s pandemic shutdowns. Investors are alert, however, for more persistent price rises that could force financial policymakers to raise interest rates more quickly than they currently expect to.
“This will be a transition year for monetary policy,” said Gergely Majoros, a member of the investment committee at European fund manager Carmignac. After becoming used to central banks’ strong support for financial markets during the pandemic, he added, “the transition is going to be a difficult one for investors to manage”.
Janet Yellen, US Treasury secretary and a former Fed chair, also told Bloomberg on Sunday that it would be “a plus” if President Joe Biden’s multitrillion-dollar stimulus programmes resulted in slightly higher interest rates.
“We’ve been fighting inflation that’s too low and interest rates that are too low now for a decade,” Yellen said.
Stock market investors were also increasingly concerned, Majoros added, about companies failing to meet analysts’ increasingly bullish earnings expectations.
After a bonanza first-quarter earnings season on both sides of the Atlantic as businesses hit by lockdowns last year profited from resurgent demand, forecasters have widely upgraded their expectations for second-quarter results.
“Analyst optimism is getting to extreme levels,” Liberum strategists Joachim Klement and David Mak commented in a research note.
“The share of companies experiencing upgrades is now roughly at all-time highs,” on both the Stoxx and the S&P 500 in the US, they said. “We expect the next earnings season to become a reality check for many analysts and investors.”
Asian markets were mixed on Monday. Hong Kong’s Hang Seng index dropped 0.5 per cent, while Japan’s Nikkei 225 added 0.3 per cent.
The yield on the ten-year US Treasury bond, which moves inversely to its price, rose by 0.02 percentage points to 1.577 per cent. The yield has climbed from about 0.9 per cent at the start of the year as investors anticipated higher inflation, which erodes the value of bonds’ fixed interest payments. Germany’s equivalent ten-year Bund yield was flat at minus 0.206 per cent.
Brent crude, the international oil benchmark, dropped 0.6 per cent to $71.49 a barrel after reaching its highest level since May 2019 in Asian trading earlier on Monday.
In currencies, the euro was steady against the dollar, purchasing $1.2163. Sterling dipped 0.2 per cent lower to $1.4133, as rising coronavirus cases prompted the government to consider keeping some lockdown measures in place in England beyond the June 21 date it had set for easing restrictions.