World stocks hit two-week lows on inflation jitters, policymakers boost yen

By Carolyn Cohn and Stella Qiu

LONDON/BEIJING (Reuters) - World stocks hit a two-week low on Friday as rate hike guidance from the European Central Bank and jitters over upcoming U.S. inflation data stoked concerns about global growth, while verbal intervention from Japan boosted the yen

The ECB said on Thursday it would deliver its first interest rate rise since 2011 next month, followed by a potentially larger move in September.

Analysts at Deutsche and Morgan Stanley (NYSE:MS) lifted their euro zone rate hike forecasts on Friday.

Investors expect the Federal Reserve to raise interest rates by 50 basis points next week, especially if U.S. consumer price data on Friday confirms elevated inflation.

The consensus forecast sees a year-over-year inflation rate for May of 8.3%, unchanged from April.

"A lot of focus is on this current number, it's not going to be a big move," said Matthias Scheiber, global head of portfolio management for multi-asset solutions at Allspring.

"I don't think it will derail what central banks currently have on their minds."

However, rate rises may hit growth, Scheiber said, adding that he had turned slightly underweight on equities in recent weeks as a result of this concern.

MSCI's world equity index fell 0.22% to its lowest since May 26, and was heading for a 2% fall for the week.

U.S. stock index futures ticked up 0.19% after the S&P 500 and Nasdaq fell more than 2% on Thursday in their biggest daily percentage declines since mid-May.

European stocks fell 1.1% to three-week lows.

It was the 17th week in a row of outflows for European equities in the week to Wednesday, according to BofA, with $2.1 billion leaving the space, as the sector has been hit hard by the Russia-Ukraine war.

Britain's FTSE 100 fell 0.75% to 2-1/2 week lows.

The Bank of England said on Friday it was satisfied that Britain's top banks could be shut down without putting at risk the stability of the financial system or disrupting customers, but it found shortcomings at Lloyds (LON:LLOY), Standard Chartered (OTC:SCBFF) and HSBC.

Pressure is rising on other central banks to tighten, with the BoE and Sweden's Riksbank expected to hike rates again next week.

"There’s currently a sense that inflation may be peaking, but that only applies to goods, and a better image is of rolling inflationary waves, as supply/demand pinch points shift," said Kit Juckes, head of currency strategy at Societe Generale (OTC:SCGLY).

The dollar fell 0.64% to 133.48 yen after Japan's government and the central bank said in a statement they were "concerned" about recent sharp yen declines and stood ready to respond as needed on currency policy.

The yen has been ploughing 20-year lows against the dollar and seven-year troughs against the euro on expectations the Bank of Japan (BOJ) will continue to lag behind other major central banks in exiting stimulus policy.

The dollar eased 0.18% against a basket of major currencies, pulling away from its highest level in three weeks set in the previous session. The euro was steady at $1.0622.

The two-year U.S. Treasury yield, which rises with traders' expectations of higher Fed fund rates, continued its climb to hover around the highest level since early May. It touched 2.8352% compared with a U.S. close of 2.817%.

The yield on benchmark 10-year Treasury notes dipped to 3.0401% compared with its U.S. close of 3.042%.

Ten-year German government bond yields inched lower to 1.425%, after hitting their highest since 2014 on Thursday.

MSCI's broadest index of Asia-Pacific shares outside Japan fell 0.9%, weighed down by a 1.2% drop in resources-heavy Australia and a 1.1% retreat in South Korea. Japan's Nikkei fell 1.5%.

However, continued strong buying by foreign investors and cautious hopes of regulatory easing on tech firms lifted China stocks, despite news that the cities of Beijing and Shanghai were back on COVID-19 alert.

China's blue-chip CSI300 index was up 1.5%, while Hong Kong shares trimmed earlier losses to be off 0.2%.

Oil prices slipped but remained within touching distance of three-month highs as fears over new COVID-19 lockdown measures in Shanghai outweighed solid demand for fuels in the United States, the world's top consumer. [O/R]

U.S. crude dipped 0.52% to $120.88 a barrel. Brent crude fell 0.5% to $122.45 per barrel.

Spot gold eased 0.12% to $1845.73 per ounce. [GOL/]