European equities fall on strong French and Spanish inflation

European equities dipped on Tuesday after the release of stronger than expected French and Spanish inflation data, which has increased investor uncertainty over the pace of interest rate rises by key central banks.

The region-wide Stoxx 600, German Dax, France’s Cac 40 and FTSE 100 all fell 0.5 per cent.

Inflation in France was 7.2 per cent in the year to February, up from 7 per cent the previous month. Economists had predicted no change. In Spain, consumer prices rose 6.2 per cent in the year to February, higher than 5.9 per cent in January and well above the fall to 5.5 per cent economists had forecast.

“The decline today is explained by the numbers on inflation in Spain and France, and clearly the consequences for equities are bad,” said Mabrouk Chetouane, head of global market strategy at Natixis Investment Managers. “The question is for how long interest rates will increase and to what level, as well as if there will be a spreading effect from the labour market.”

Meanwhile, US futures contracts slipped, with the blue-chip S&P 500 and the tech-heavy Nasdaq Composite both dropping 0.3 per cent.

Monday saw the release of another batch of economic data suggesting a robust US economy. Orders for non-defence capital goods excluding aircraft — a closely watched proxy for business investment, rose 0.8 per cent in January from a month earlier, comfortably above economists’ forecasts.

However, on Monday stocks recorded an upturn after their biggest weekly tumble in two months.

“Last year’s pessimism seems to have subsided despite renewed concerns about inflation, upcoming interest rate hikes and continued growing geopolitical concerns . . . At the same time, more and more interest rate hikes are being priced in,” said analysts at SEB Research.

Investors will be watching the FHFA house price index in the US on Tuesday, while on Thursday they will be watching for European flash inflation data, as well as a speech from European Central Bank executive board member Isabel Schnabel.

The data released recently has prompted central banks such as the Federal Reserve and ECB to pledge to raise interest rates for longer.

Fed board member Philip Jefferson maintained in remarks at Harvard University that the fight against rising prices would be a long one, and that the US central bank did not need to abandon its 2 per cent inflation target. He pointed to the shortage of workers as the reason why inflation in the services sector was so persistent.

“The inflation outlook for this non-housing category of core services partly depends on whether growth in nominal labour costs comes back down,” he said.

Yields on 10-year US Treasuries rose 0.03 percentage points to 3.95 per cent, while two-year contracts, which are more sensitive to monetary policy, also gained 0.03 percentage points, to 4.82 per cent. On Monday, 10-year yields rose to their highest intraday level since November, at 3.977 per cent, before dropping back later in the day. The yields on 10-year German Bunds rose 0.06 percentage points to 2.65 per cent — their highest level since June 2011.

The dollar index, which measures the greenback against a basket of six peer currencies, gained 0.1 per cent, while the euro rose 0.1 per cent. Sterling gained 0.25 per cent, after rising 1 per cent on Monday as the UK and EU reached a deal on post-Brexit trading rules.

Brent crude rose 0.7 per cent to $82.99 per barrel, while WTI, the US equivalent, gained 0.8 per cent to $76.30 per barrel.

Hong Kong’s Hang Seng index fell 0.8 per cent, while China’s CSI 300 rose 0.6 per cent.