Global stock markets waver amid central banks’ inflation concerns

By Katanga Johnson

WASHINGTON (Reuters) - World equity markets dipped again on Friday as investor worries about cloudy central bank signals and rising tensions between Western powers and Russia drove one of the worst-ever starts to a year for stocks.

Strong earnings from Apple (NASDAQ:AAPL) provided some encouragement for battered tech and U.S. markets [.N], but traders were struggling to draw a line under a global sell-off that has firmly taken root.

The pan-European STOXX 600 index tumbled nearly 1.61%, on course for its fourth straight weekly drop (EU), while volatile U.S. equities suffered from major sell-offs as traders weighed concerns about tighter monetary policy by the Federal Reserve [.N].

Friday's session had opened slightly higher after economic reports eased initial inflation concerns.

MSCI's 50-country main world index shed 0.04%, after earlier losing roughly $7 trillion in value, putting it on the brink of its worst January since the 2008 global financial crisis.

The dollar, meanwhile, consolidated gains on Friday and was on track for its biggest weekly rise in seven months against other major currencies as markets priced in a year ahead of aggressive hikes in U.S. interest rates[/FRX].

"The big issue is the Fed, which is clearly in a tightening cycle. Financial market support is not part of the central bank's agenda," said Tim Ghriskey, senior portfolio strategist at Ingalls & Snyder in New York.

"The only question is whether the markets have fully digested Powell's guidance in his press conference. ... I would expect the equity and bond markets to find bottoms at some point relatively soon," he added.

GRAPHIC - World stocks suffer January plunge

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The Fed on Wednesday indicated that it is likely to raise rates in March, as widely expected, and reaffirmed plans to end its pandemic-era bond purchases that month before launching a significant reduction in its asset holdings.

On Wall Street, the Dow Jones Industrial Average fell 0.24%, the S&P 500 gained 0.28% and the Nasdaq Composite added 0.74%.

The prospect of faster or larger U.S. interest rate hikes and possible stimulus withdrawal lifted the dollar index 0.01% to 97.232, with the euro also barely up 0.05% at 1.1149.

In the big government bond markets that drive global borrowing costs, the yield on benchmark 10-year Treasury notes was down 2.2 basis points at 1.786% as the Fed's favored inflation gauge, the core personal consumption expenditure price index (PCE), rose no more than had been expected.

In the 12 months through December, the PCE increased 5.8%. That was the largest advance since 1982 and followed a 5.7% year-on-year increase in November.

The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was down 2.8 basis points at 1.164%, having started the year at roughly 0.75%.

Britain's pound rose close to a 23-month high against the euro as investors expected the Bank of England to raise rates next week and follow a path of rapid monetary tightening in 2022.

Investors were digesting a European Union document that showed foreign banks based in the EU may have to hold more capital and liquidity under revisions to rules being considered by the bloc's member states.

Also in focus was Italy, where bond yields were up as its parliament struggled to elect a new president.

GRAPHIC - Global bond yields are rising

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OIL PRESSURE

Oil prices reached seven-year highs after the inflation data and as geopolitical tensions continue to raise concerns that the Ukraine crisis could disrupt energy markets.[O/R]

U.S. President Joe Biden and his EU counterpart Ursula von der Leyen pledged to cooperate on guaranteeing the energy security of Europe and Ukraine amid the standoff triggered by Russia amassing troops at Ukraine's border.

U.S. crude rose 1.29% to $87.73 per barrel and Brent was at $90.64, up 1.46% on the day.

"Where Brent crosses the $90 level, we see some selling from a sense of accomplishment, but investors start buying again when the prices fall a little as they remain cautious about possible supply disruptions due to rising geopolitical tensions," said Tatsufumi Okoshi, senior economist at Nomura Securities.

"The market expects supply will stay tight as the OPEC+ is seen to keep the existing policy of gradual increase in production," he said.

The market is focusing on a Feb. 2 meeting of the Organization of the Petroleum Exporting Countries (OPEC) and allies led by Russia, a group known as OPEC+. It is likely to stick with a planned rise in its oil output target for March, several sources in the group told Reuters.

GRAPHIC - Apple sours, oil on the boil

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