Europe heads lower on inflation fears, weaker commodity prices

European markets are trading sharply lower on Wednesday, after a late sell-off on Wall Street. Inflation fears continue to haunt the market, while a sell-off in commodities sends resource stocks southwards.

Wall Street experienced a significant sell-off, led southwards by high-growth tech stocks as market participants showed their nerves ahead of the release of the FOMC minutes later today. These stocks are particularly sensitive to rising interest rates.

Inflation fears and concerns surrounding the timing of the Fed’s next move have been stalking the markets for weeks. While Fed speakers have been out in droves reiterating its dovish stance, the market looks undecided. Some days, the markets are prepared to take the Fed at their word. Today is not one of those days. The markets are clearly nervous about what the FOMC could reveal.

The minutes from the latest FOMC meeting are due to be released later. However, it is worth pointing out that the meeting was held before last week’s shock inflation read and the weak non-farm payroll and retail sales data. This really makes them quite out of date. Even so, the markets are not focused on that, and the minutes will be scrutinised for clues as to when the central bank might start tapering its bond purchases.

Inflation data in the UK did little to calm nerves. UK CPI more than doubled to 1.5% YoY in April amid a rise in household utility and petrol prices. With travel restarting, inside hospitality re-opening and rebounding consumer demand, prices are expected to continue to rise, exceeding the BoE’s target 2% before the end of the year.

The UK’s inflation figure is significantly below the US CPI shock of 4.2%. It would have been notably higher if it weren’t for the temporary 5% VAT rate on hospitality, due to last until September.

While the UK isn’t experiencing the same surge in inflation seen in the US, it was still a large enough move to unnerve the markets. The FTSE trades more than 1.2% lower. Heavyweight resource stocks and oil majors are dominating the lower reaches of the index, tracing commodity prices down.

FX – USD rises, euro falls on weak CPI data

The US dollar is edging higher, snapping a three-day losing run, although it continues to trade around multi-month lows ahead of the FOMC minutes. Fed-speak over the past week has ground the greenback lower. The Fed has continually reassured the market that rates will remain low until next year. The US central bank considers rising inflation temporary, while weakness in the US jobs market signals that continued support is needed.

The pound trades flat despite the jump in inflation, while the euro has given up earlier gains on the back of disappointing CPI data. Inflation concerns in the Eurozone seem a little far-fetched, particularly in light of the continual struggle that the region has had attempting to lift inflation.

Eurozone CPI rose 0.6% in April MoM, down from 0.9% in March. Core CPI rose 0.7% YoY in April, down from 0.8% and missing forecast of 0.8%. Still, Europe is well behind the US as far as re-opening is concerned, so there is room for further gains in CPI. However, a surge similar to the US is looking unlikely.

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