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US equities capped off their worst week in nearly three months on Friday as renewed concerns about inflation dented optimism over continued central bank support for financial markets.
The S&P 500 closed down 0.8 per cent while the tech-focused Nasdaq Composite fell 0.9 per cent, representing weekly falls of 1.7 per cent and 1.6 per cent, respectively — their worst performances since mid-June.
Investor confidence was knocked on Friday when data showed US factory gate prices rose 0.7 per cent month on month in August, which exceeded economists’ expectations for a 0.6 per cent increase.
Ian Lyngen, interest rate strategist at BMO Capital Markets, said the inflation reading reinforced “the ongoing concerns regarding elevated cost structures” as supply chain disruptions caused by the Covid-19 pandemic persisted.
Jorge Garayo, global head of inflation strategy at Société Générale, said: “The market is starting to think maybe 2022 will be a year when inflation remains high.”
“I haven’t seen anything that convinces me of when this disruption will be resolved,” Garayo added, pointing to shortages of everything from computer chips to cupboards caused in part by coronavirus-triggered shutdowns in Asian producer nations.
US government debt sold off, taking the yield on the 10-year Treasury note up 0.04 percentage points to 1.34 per cent. Yields move inversely to price.
In Europe, sovereign debt was also out of favour, a day after the continent’s central bank said it would “moderately” slow bond purchases under its €1.85tn emergency monetary stimulus programme.
The yield on the 10-year German Bund — the eurozone’s benchmark safe asset — climbed 0.03 percentage points to minus 0.33 per cent, while the yield on the equivalent Italian bond jumped by the same margin to 0.7 per cent.
Christine Lagarde, European Central Bank president, signalled that the bond-buying might continue in another form in 2022, saying “there remains some way to go before the damage done to the economy by the pandemic is undone”.
The ECB’s move was “symbolic of the sea change ahead”, said strategists at Bank of America. “Central banks, as the buyers of first resort, are stepping back.”
Antonio Cavarero, head of investments at Generali Insurance Asset Management, argued central bankers still remained reluctant to cut their emergency debt purchases, which had driven down bond yields and increased the relative appeal of equities.
“Do not expect a straight line towards monetary tightening,” he said. “Central banks are sending signals to test the waters, to see if markets and economies can accept the idea of higher rates.”
European stocks also ended the week weaker, with the region-wide Stoxx 600 benchmark closing down 0.3 per cent for a weekly fall of 1.2 per cent, its steepest slide since mid-August.
The dollar index, which measures the US currency against six peers, edged up 0.13 per cent. Brent crude, the oil benchmark, rose 2 per cent to $72.84 a barrel in response to production delays caused by Hurricane Ida.
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