US equities turn around and trade declines as rising oil prices raise fears of inflation

Shares on Wall Street gave up on previous gains after a sharp rise in oil prices helped rekindle inflation concerns, even after a significant drop in US inflation information came out lower than expected.

The S&P 500 was 0.3 percent lower in the afternoon in New York, after rising by up to 1.3 percent earlier on Tuesday. The technical weight of the Nasdaq Composite decreased by 0.2 percent.

Oil prices rose more than 6 percent, undermining a positive reaction to new US inflation data released on Tuesday morning.

The release of price increases for volatile items such as food and energy led to a “core” US consumer price index rising by 0.3 per cent month-on-month, below the 0.5 per cent forecast by economists asked by Reuters.

On the other hand, primary consumer prices rose by 8.5 per cent year-on-year in March, up from 7.9 per cent in February, said the Directorate of Labor, which marks the fastest annual increase since 1981.

A lower level of core inflation initially led to some relief for investors, who feared that a spike in inflation would put pressure on the US Federal Reserve to curb inflation by raising interest rates rapidly – a prospect that has caused volatility in global markets in recent months.

Jim Paulsen, chief investment officer at The Leuthold Group, said it was “much weaker” than expected that core inflation would be unlikely to thwart the central bank’s plans to raise interest rates sharply at its next meeting in May.

Last month, the Central Bank raised its reference rate by a quarter of a percentage point, bringing the target to 0.25 percent to 0.50 percent, in its first increase since 2018.

In the sovereign debt markets, the yield on the 10-year US Treasury bond, which covers international borrowing costs, fell by 0.06 percentage points to 2.72 per cent. Yields on the two-year note, which closely monitors interest rate expectations, fell further, indicating that investors have reset their expectations of interest rate hikes following the release of data.

The yield on the 10-year German bond, which measures European borrowing costs, fell by 0.03 percentage points to 0.79 percent. The yield on the Treasury bond was around minus 0.12 percentage points at the beginning of the year.

German investor confidence, as measured by the Zew Research Institute’s economic sentiment index, has fallen to its lowest level since the first month of the coronavirus virus.

Elsewhere in the stock market, the European Stoxx 600 index fell by 0.4 percent, the German Dax fell by 0.5 percent and the French Cac 40 fell by 0.3 percent. The FTSE 100 in London fell by 0.5 percent. Shares in European banks were among the worst performing, while shares of German lenders Deutsche Bank and Commerzbank fell by more than 9 per cent and 8 per cent respectively.

Andrew McCaffery, Fidelity International’s chief investment officer, said he was “particularly cautious” about European equities and the euro in light of the “likelihood” of a recession.

In Asia, the Hang Seng index in Hong Kong rose by 0.5 percent and the CSI 300 in China rose by 1.9 percent. Japan’s Topix fell 1.4 percent and South Korea’s Kospi fell 1 percent.

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