Stocks wobble, bond bashing alive and kicking as U.S. CPI looms

By Dhara Ranasinghe

LONDON (Reuters) -World stocks slipped to their lowest levels in almost a month, the dollar held firm and selling again gripped the world’s biggest bond markets on Tuesday with data expected to show annual U.S. inflation rising at its fastest pace in 40 years.

Oil prices jumped over 4% as Shanghai’s relaxation of some COVID-19 restrictions eased concerns about Chinese demand and as oil-producing group OPEC warned it would be impossible to replace potential supply losses from Russia.[O/R]

With U.S. 10-year Treasury yields rising to new highs above 2.80%, levels last seen late 2018, sentiment was weighed down by unease that an aggressive policy response to inflation from the Federal Reserve could undermine economic growth.

European shares were down 0.5%, Japan’s blue-chip Nikkei stock index shed 1.81% and trade in U.S. equity futures was mixed.

Deutsche Bank and Commerzbank shares fell sharply after the previous day’s sale of more than 5% in both of Germany’s top two lenders by an undisclosed investor.

That all left MSCI’s world equity index flagging at its lowest levels in almost a month.

Economists polled by Reuters forecast the U.S. consumer price index (CPI) would post an 8.4% year-over-year increase in March, versus a 7.9% rise a month earlier.

“Markets have decided that central banks are late and need to do more to tame inflation, and moderate volatility in equities is not enough to stop this,” said Nordea chief analyst Jan von Gerich. “The reason for the wobble in equity markets is higher rates and geopolitics.”

U.S. 10-year Treasury yields pulled back from their highs. Still, they are up almost 45 basis points so far this month.

More disconcerting for equities is the move in real or inflation adjusted yields, with the yield on the 10-year U.S. Treasury Inflation-Protected Securities (TIPS) approaching 0%.

In Europe, German Bund yields climbed to almost 0.88%, their highest level since 2015, British gilt yields rose to fresh multi-year highs.

Germany’s ZEW economic research institute said its economic sentiment index fell to -41.0 points from -39.3 in March, declining less than expected.

STRONG DOLLAR

Higher Treasury yields supported the dollar.

The dollar index, a measure of the greenback’s value against six peers, was back above 100 to touch its highest level in almost two years.

The dollar was a touch firmer at 125.58 yen, having risen on Monday to its highest since June 2015 at 125.77.

Japan’s yen has been hurt by the Bank of Japan’s commitment to maintaining ultra-easy policy even as the likes of the Fed embark on tightening monetary policy.

Latest warnings from Japanese policymakers, with Prime Minister Fumio Kishida stating on Tuesday that rapid currency moves are undesirable, failed to shore up the yen, which has shed over 3% this month.

“Markets at this point are not sure policymakers are genuinely inclined to intervene on the yen and that’s why we have most likely seen a limited impact,” said James Lord, global head of FXEM Strategy at Morgan Stanley. “Typically verbal intervention doesn’t have much impact on currency markets, and that’s not specific to the yen.”

The euro was down 0.15% at $1.08665, unable to hold on to gains from a mini-relief rally on Monday, after French leader Emmanuel Macron beat far-right challenger Marine Le Pen in the first round of presidential voting.

China’s markets and oil prices gained ground as signs emerged that some of the COVID-19 restrictions were starting to ease in financial hub Shanghai.

An easing of China’s regulations on the gaming sector also gave investors heart after a multi-year crackdown on parts of the country’s technology industry.

China’s blue chip CSI300 Index dipped into negative territory mid-session but roared back in the afternoon to rally almost 2%.

Brent crude rose 4.5% to $102.68 per barrel, while U.S. crude was 4.25% higher at $98.29 .

The Organization of the Petroleum Exporting Countries warned that it would be impossible to replace 7 million barrels per day (bpd) of Russian oil and other liquids exports lost in the event of sanctions or voluntary actions.

The European Union has yet to agree any embargo on Russian oil over the war in Ukraine, but some foreign ministers said the option is on the table.

In emerging markets, Sri Lanka’s central bank said on Tuesday it had become “challenging and impossible” to repay external debt, as it tries to use its dwindling foreign exchange reserves to import essentials like fuel.

(Reporting by Dhara Ranasinghe; additional reporting by Scott Murdoch in HONG KONG; editing by Nick Macfie and Chizu Nomiyama)