Global markets muted as investors debate inflation outlook

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European stocks were on track to snap a three-day losing streak as concerns over the prospect of rising inflation rippled through capital markets.

In Europe, the region-wide Stoxx 600 crept up 0.5 per cent by the afternoon, while London’s FTSE 100 index climbed 0.2 per cent and Frankfurt’s Xetra Dax was 0.7 per cent higher.

The prospect of US president Joe Biden’s $1.9tn stimulus plan has led to a sell-off in US government debt on concerns that the fiscal injection will feed through to higher inflation, which erodes the value of bonds’ coupons. That pushed up the yield on the 10-year US Treasury to a one-year high of 1.33 per cent earlier this week.

On Friday, the yield on the 10-year note was at 1.31 per cent. The higher bond prices had a knock-on effect on stocks, driving Wall Street to its first three-session losing streak of 2021 on Thursday. Concerns are rising that higher yields could undercut the rally in riskier assets, said Jim Reid, research strategist at Deutsche Bank, noting the multiple highs US stocks indices have hit this year. Futures markets implied the US blue-chip S&P 500 index would gain 0.4 per cent at the open.

The oil rally lost steam but prices still hovered near their highest levels since January 2020. Brent crude, the international benchmark, fell 1.2 per cent to just above $63 a barrel.

According to Reid, prices were being weighed down by the recommencing of Texas oil production and news that the White House was willing to negotiate with Iran over a return to the nuclear deal, a move that could pave the way for a rise in the country’s crude exports.

Sterling advanced 0.2 per cent against the dollar crossing $1.40 — its highest level since March 2018.

“Sterling has been undervalued since the period before the Brexit referendum, and now there is a general view that the UK is ahead of Europe in terms of its response to Covid-19,” said Savvas Savouri, chief economist at Toscafund Asset Management.

The lockdown, however, continues to weigh on the UK economy. The latest figures from the Office for National Statistics showed British retail sales fell sharply this month. The volume of sales between December and January slid 8.2 per cent, which was double the decline in sales between November and December.

In Asia, China’s CSI 300 index gained 0.2 per cent, as did Hong Kong’s Hang Seng index, while South Korea’s Kospi 200 added 0.8 per cent.

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