Shares slip, dollar dominates as recession looms

By Lawrence White

LONDON (Reuters) - European shares slumped to month-long lows, oil prices fell and the dollar surged on Monday as fears mounted that inflation-busting interest-rate hikes in the United States and Europe will weaken the global economy.

The benchmark European STOXX index fell as much as 1.1% on Monday, touching its lowest since July 28, after Russia's Gazprom (MCX:GAZP) said it would halt natural gas supplies to Europe for three days at the end of the month.

The tightening gas supplies further stoked worries about the continent's economic growth following hawkish signals from European Central Bank policymakers.

Authorities in Europe, as in the United States, are hiking rates to combat rocketing prices for fuel and goods.

U.S. Federal Reserve Chair Jerome Powell headlines a host of policymakers at a symposium in Jackson Hole, Wyoming, later in the week, with expectations growing of further rate hikes rather than a pivot to a more dovish policy.

"We expect a reminder that more tightening is needed and there is still a lot of progress to be done on inflation, but no explicit commitment to a specific rate hike action for September," said Jan Nevruzi, an analyst at NatWest Markets.

"For markets, a bland delivery like that could be underwhelming."

Futures are fully priced for another hike in September, with the only question being whether it will be 50 or 75 basis points. Rates are expected to reach 3.5% to 3.75% by year end.

A Reuters poll of economists forecast the Fed will raise rates by 50 basis points in September, with the risks skewed towards a higher peak.

One exception to the tightening trend is China, where the central bank trimmed some key lending rates by between 5 and 15 basis points on Monday in a bid to support a slowing economy and a stressed housing sector.

Unease over China's economy tipped the yuan to a 23-month low, while pressuring stocks across the region.

MSCI's broadest index of Asia-Pacific shares outside Japan fell a further 0.9%, though Chinese blue chips did manage to gain 0.7%.

U.S. markets looked set to follow the bearish tone, with S&P 500 futures down 1.1% and Nasdaq futures falling 1.4%.

The S&P 500 has repeatedly failed to clear its 200-day moving average around 4,320 and ended last week down 1.2%.

BofA's latest survey of investors found most were still bearish, though 88% did expect lower inflation over time, the highest proportion since the financial crisis.

"That helps explain this month's rotation into equities, tech and discretionary, and out of defensives," said BofA strategist Michael Hartnett. "Relative to history, investors are still long defensives and short cyclicals."

UNSTOPPABLE DOLLAR

The U.S. dollar, meanwhile, continued to steamroll other currencies, rising briefly above parity versus the fragile euro and hitting five-week highs against a basket of peers as Fed officials reiterated their tightening stance.

The euro fell to as little as $0.99945, its lowest since mid-July, and was last down 0.3% on the day, after Russia announced the pending temporary halt to gas supplies.

The greenback has risen steadily against peers in the last few months as the most liquid of safe havens, last week jumping 2.3% in its best performance since April 2020. [USD/]

It was last up 0.2% at 108.36 at 1053 GMT on Monday.

"The USD can track above 110.00 this week if the August flash PMIs for the major economies show a further slowing in economic growth or contraction in activity," said Joseph Capurso, head of international economics at CBA, referring to surveys of manufacturing due on Tuesday.

Euro zone government bond yields edged lower on Monday, just off their multi-week highs, as inflation fears kept investors focused on expectations for more monetary tightening.

Germany’s 10-year government bond yields fell 3 basis points to 1.99%. Last Friday, it hit its highest since July 21 at 1.242%.

Global bond yields spiked last week amid the relentless drumbeat of worrying inflation data, with British 10-year yields up by the most in five years and bund yields likewise soaring on reports showing sky-high prices.

Minutes of the European Central Bank's last policy meeting are due this week and are likely to sound hawkish, since they decided to hike by 50 basis points.

The rise in the dollar has been a setback for gold, which extended its slide down to $1,735 an ounce as expectations of higher interest rates hurt non-yielding bullion. [GOL/]

Oil prices were also under pressure, amid worries about global demand and the robust dollar, as well as consultations between the United States and the European Union on Iran's response to the latest nuclear pact proposal. [O/R]

Brent was down 15 cents at $96.56, while U.S. crude lost 12 cents to $90.65 per barrel.