World markets had another turbulent session on Tuesday as investors continued to fret about inflation, interest rates and economic growth.

Yet again, emerging market equities and currencies suffered heavy selling.

There were sharp falls too for Asian and European shares, while commodities prices fell through several key levels.

But the dollar continued to rally on expectations that the Federal Reserve would raise interest rates at least one more time to ward off the threat of inflation.

“The increased volatility that we are witnessing is largely a reaction to the change in the central banks’ approach to inflationary prospects,” said Roger Hirst, European equity strategist at Bear Stearns.

“Inflation now looks more structural than just headline, and this is a realisation that is only just beginning to break on investors.”

A series of central bank interest rate rises last week, in response to concerns about inflationary pressures, prompted fears among investors about the prospects for global growth.

In Tokyo, the Nikkei 225 Average in Tokyo plunged 4.1 per cent, its worst one-day decline for two years, to a fresh seven-month low.

South Korean shares dropped 2.9 per cent, Hong Kong fell 2.5 per cent and Singapore shed 1.9 per cent.

The selling spilled over to Europe, where the FTSE Eurofirst 300 index tumbled
2.1 per cent – its sixth fall of more than 2 per cent in the past five weeks.

In emerging markets, the RTS index in Moscow tumbled more than 9 per cent, Turkish stocks fell 5.7 per cent and Mumbai shed
4.4 per cent.

There was no respite for emerging market currencies either. The Polish zloty and the Hungarian forint continued to slide, while Turkey’s central bank intervened to support the lira for the first time since May 2004.

An early rally for US stocks quickly ran out of steam, and by midday in New York the Dow Jones Industrial Average was flat. The S&P 500 was 0.2 per
cent lower but the Nasdaq Composite was up 0.1 per cent.

The first of two important US inflation indicators due for release this week – the May producer price index – did little to alter investors’ US rate expectations.

The core PPI, which excludes food and energy, rose 0.3 per cent, compared with the consensus forecast of a 0.2 per cent increase. More attention is likely to be paid to Wednesday’s US consumer price data.

There was unsettling economic news on the other side of the Atlantic. The forward-looking German ZEW economic sentiment index came in at 37.8 in June, lower than expected and down from 50.0 in May.

“The downtrend in the ZEW expectations headline highlights investor concerns about correcting global imbalances, normalising financial market risk premia and central bank overshooting, led by the US Fed, all of which are fuelling concerns about the growth outlook,” said Lena Komileva, G7 market economist at Tullett Prebon.

Commodities prices fell back across the board. Gold slid back below $600 an ounce, while copper dropped below $7,000 a tonne.

Benchmark US crude oil futures dropped below $69 a barrel.

The dollar maintained its firm tone, touching a fresh one-month high against the euro and six-week peak against the yen.

However, David Bloom, at HSBC, warned that while the recent market volatility might be helpful to the dollar in the short-term, it would be unlikely to offer sustained support.

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