European markets open lower as global sell-off continues
Education publisher Pearson (PSON.L) and luxury goods business Burberry (BRBY.L) set a strong pace in the UK blue chip index after their shares rose 4% on the back of trading updates.
Good performance from BP (BP.L) and Shell (RDSB.L) following the latest rise in oil prices also helped the index to a better than expected performance.
Sterling (GBPUSD=X) strengthened 2% against the dollar as a surge in consumer prices to their highest level since 1992 added pressure on the Bank of England to raise interest rates next month.
Financial markets now price in a more than 90% chance that the Bank of England will raise its main interest rate to 0.5% on 3 February.
Consumer price inflation (CPI) rose to 5.4% from 5.1% in November, coming in above consensus expectations of 5.2%. It marks the fastest pace of price rises since March 1992, when it was 7.1%.
Alpesh Paleja, lead economist at the CBI, said: “We’ve not seen the end of rising inflation yet. We expect it to peak in the months ahead, not least if, as expected, the energy price cap is raised.”
Capital Economics said: “It’s no secret that inflation is going to rise even further. The increases in producer prices already seen have yet to fully filter through into consumer prices. And the surge in wholesale gas and electricity prices could result in an increase in utility prices on 1 April in the region of 50%.
“Those effects would be enough to push up CPI inflation to 7.0% in April. That would be higher than the peak of 6% that the Bank of England was forecasting when it raised rates in December.”
Read More: UK inflation hits 30-year high as cost of living squeeze looms
S&P 500 futures (ES=F) were down 0.7%, Dow futures (YM=F) shed 0.6%, and Nasdaq futures (NQ=F) were 0.84% lower as trade began in Europe.
Across the pond on Tuesday, Wall Street ended deep in the red on return from a long weekend, with the Dow Jones (^DJI) shedding 543 points or, 1.5%, after Goldman Sachs (GS) shares sold off as the investment bank missed analysts’ expectations for earnings. The S&P 500 (^GSPC) dipped 1.8%, and the tech-heavy Nasdaq (^IXIC) fell 2.6%.
US treasury yields pushed higher with the 2- and 10-year yields reaching levels last seen 2 years ago as markets move to price in a swifter pace of tightening by the Federal Reserve. This is also adding to headwinds for the tech sector, which typically suffers most from higher yields.
Read More: Pearson lifts profit outlook on strong sales
“While we see 10-year yields climbing modestly higher, from 1.88% at present to around 2% by June and 2.1% by year-end, we do not forecast a sharper rise. The 2-year Treasury, meanwhile, has moved too aggressively in pricing in Fed tightening, in our view, and we expect the yield curve to steepen.
“This steepening should further improve the positive backdrop for financial services companies,” Mark Haefele, chief investment officer, UBS Global Wealth Management, said.
Asian markets were lower overnight as Chinese and Hong Kong shares fell. The Shanghai Composite (000001.SS) was off 0.4% while the Hang Seng (^HSI) was down 0.4%. The Nikkei (^N225) was not trading.
Meanwhile, gold (GC=F) was quoted at $1,817.10 an ounce early on Wednesday, higher than the $1,812.88 seen on Tuesday. Brent crude oil (BZ=F) was trading at $88.26 a barrel, higher than the $87.22 seen late on Tuesday as ebbing concerns over the Omicron variant and tensions in Europe and the Middle East helped to drive the rally.