Shares struggle after hot UK inflation, New Zealand rate hike

By Danilo Masoni

(Reuters) – World shares struggled and oil prices fell on Wednesday as the UK’s highest inflation since 1982 and a rate hike in New Zealand reminded investors of the challenges facing the global economy.

MSCI’s benchmark for global stocks came off initial highs and by 1055 GMT it was barely changed, signalling that a bounce started in July was running out of steam.

European shares fell 0.3%, while the MSCI’s broadest index of Asia-Pacific shares outside Japan added 0.1%, off earlier highs.

Wall Street looked set for a weaker start, with S&P 500 futures down 0.7% after strong gains on Tuesday following stronger-than-expected results from Walmart and Home Depot which bolstered optimistic views on the health of consumers.

But a bigger than expected jump in British consumer price inflation to 10.1% in July highlighted growing pressures on households and helped cement expectations of another 50 basis point (bps) rate hike at the Bank of England’s next meeting.

After an initial spike on the data, sterling pared some gains and was little changed against the dollar, while UK two-year bond yields surged to their highest level in almost 14 years.

“Higher inflation should trigger a more aggressive monetary policy response from the Bank of England – a bullish signal for sterling,” said Matthew Ryan, Head of Market Strategy at Ebury.

“On the other hand … higher prices present a clear downside risk to economic activity, and raise the possibility of a potentially prolonged UK recession, which is clearly bearish for GBP.”

UK two-year yields, which are sensitive to rate hike expectations, rose above 10-year yields, marking an inversion of the yield curve that many investors say is a harbinger of a major economic slowdown.

New Zealand shares were flat. After an initial spike the kiwi dollar turned negative after the country’s central bank announced a fourth consecutive 50 bps rate hike without giving hints of slowing down.

The hike was in line with forecasts, but Imre Speizer, head of NZ market strategy at Westpac, said the tone of RBNZ’s statement was more hawkish than expected.

“Clearly they’re a bit more worried about wage inflation and a very tight labour market, that’s been a big recent development,” Speizer said.

In foreign exchange markets, the dollar index gained 0.1% to 106.59 ahead of the release of minutes from the Federal Reserve’s latest meeting which investors will scrutinise for more clues on its policy tightening outlook.

The index, which tracks the greenback against six main peers, has recovered most of the ground it lost last week after a cooler-than-expected U.S. inflation reading but remains well off its mid-July top.

In Europe, yields rose as the UK inflation data shifted investors’ focus back to potential further monetary tightening in the euro area. German two-year bond yields rose 13 bps to 0.714%, their highest since July 21.

Ten-year Treasury yields rose 4 bps to 2.865%.

Oil hit a six-month low after a brief rally as concerns about the prospect of a global recession overshadowed a report showing lower U.S. crude and gasoline stocks. [O/R]

Brent crude was down 0.4% at $92 a barrel while U.S. West Texas Intermediate crude was down 0.1% at $86.4.

Spot gold traded in a narrow range and was last down around 0.3% at $1,771 an ounce.

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(Reporting by Danilo Masoni and Sam Byford in Tokyo; Editing by Nick Macfie and Catherine Evans)