European stocks fall as rising oil prices stoke inflation worries

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European stocks fell on Wednesday as investors assessed whether high energy prices might keep inflation elevated for longer and push policymakers to increase interest rates this month.

Europe’s region-wide Stoxx 600 gave up 0.4 per cent at the opening bell, extending losses from the previous session. France’s Cac 40 and Germany’s Dax fell by the same amount.

Futures contracts tracking Wall Street’s benchmark S&P 500 and those tracking the tech-focused Nasdaq Composite slipped 0.1 per cent ahead of the New York open.

The moves came as investors prepared for the release of highly anticipated US inflation data, which is forecast to show that consumer prices rose at an annual rate of 3.6 per cent in August, up from 3.2 per cent in the previous month.

An increase in the headline figure is expected as energy costs have soared since June after oil exporters Saudi Arabia and Russia announced a series of supply cuts in a bid to prop up prices.

International benchmark Brent crude added 0.3 per cent to trade at $92.3 a barrel on Wednesday after hitting a 10-month high in the previous session. The US equivalent West Texas Intermediate rose 0.4 per cent to $89.15.

Despite the uptick, analysts doubt whether Wednesday’s inflation figures will be high enough to press the US Federal Reserve to raise interest rates when policymakers meet next week.

“The number would have to be very hot for the market to think that the Fed will change its policy,” said Mike Zigmont, head of research and trading at Harvest Volatility Management.

Core US inflation, which excludes volatile energy and food prices, is expected to have gone down to 4.3 per cent year on year in August, from 4.7 per cent in the previous month.

The added pressure on prices, however, prompted traders to tip their bets in favour of another rate increase by the European Central Bank, which is due to announce its policy decision on Thursday.

Swaps markets are now placing a 67 per cent probability that the central bank will increase eurozone interest rates by 0.25 percentage points to 4 per cent this week.

If “the ECB does decide to hike tomorrow, they are more likely to indicate a willingness to pause thereafter, keeping the impact on the terminal rate fairly limited”, said Jason Davis, global rates portfolio manager at JPMorgan Asset Management.

Yields on the policy-sensitive two-year German Bund rose 0.04 percentage points to 3.16 per cent, while yields on the 10-year Bund, a regional benchmark in Europe, advanced 0.02 percentage points to 2.66 per cent. Bond yields rise when prices fall.

Asian markets edged lower on Wednesday, with China’s benchmark CSI 300 and Hong Kong’s Hang Seng down 0.2 per cent, while Japan’s Topix gave up 0.1 per cent.