Stocks stutter as fears over economic growth deepen

European and Asian equities slipped lower on Friday after a week in which disappointing data releases have hardened investors’ fears of higher interest rates and slower economic growth.

The regional Stoxx 600 lost 1 per cent at the open while Germany’s Dax slipped 1.4 per cent. In Asia, Hong Kong’s Hang Seng index lost 0.9 per cent and Japan’s Topix fell 0.6 per cent.

A mixed array of data have weighed on investor confidence this week, with US inflation figures coming in hotter than anticipated on Tuesday, forcing investors to crank up their expectations of interest rate rises when Federal Reserve policymakers meet next week.

Strong US employment data published on Thursday added strength to fears the Fed would continue with its aggressive rate tightening cycle. This led the broad S&P 500 down 1.2 per cent on Thursday to its lowest level since mid-July. Futures contracts tracking the benchmark index were down 0.8 per cent on Friday morning.

Markets are now pricing in a one-in-four chance of a full percentage point rise next week, with a third consecutive 0.75 percentage rise the most likely outcome.

The prospect of higher interest rates and dampening growth prospects have led the dollar to recoup losses against other currencies, as investors seek refuge in the world’s reserve currency.

The dollar was up 0.1 per cent against a basket of six currencies on Friday morning, after the euro slipped below parity once again, by 0.1 per cent to $0.99.

The pound also slipped back as falling retail sales in the UK in August raised concerns of an imminent recession, as consumers pulled back on spending to cope with rising energy and food costs. The Bank of England will make a decision on how high to raise interest rates next week.

Spending fell 1.6 per cent between July and August, far below the 0.5 per cent contraction anticipated by economists. “August’s drop in retail sales . . . is another development that should steer the monetary policy committee towards a [0.5 percentage point] increase in bank rate next week, rather than the [0.75 percentage point] hike deemed most likely by markets,” said Gabriella Dickens, senior UK economist at Pantheon Macroeconomics.

In bond markets, the 10-year UK gilt yield fell 0.02 percentage points to 3.13 per cent, as its price rose. In Germany, the equivalent Bund yield rose 0.04 percentage points to 1.77 per cent, while US Treasuries were flat at 3.4 per cent.