Investors were braced for further turbulence in global financial markets on Wednesday ahead of the release of the latest US consumer price inflation figures, the key economic data of the week.
The inflation data is seen as key to the short-term outlook for US interest rates ahead of the Federal Reserve’s next meeting at the end of June.
Equity markets tumbled across the globe on Tuesday as nervous investors sold in response to a cocktail of worries over the outlook for inflation, interest rates and economic growth.
Asian markets managed a limited recovery but sentiment remained very fragile. European equities struggled to make any headway on Wednesday.
In London, the FTSE 100 gave up its early gains to move lower by the end of morning trade on Wednesday, falling 8.5 points or 0.2 per cent at 5,511.10.
On Tuesday, losses in the oil and mining sectors dragged the FTSE 100 down 101.3 points, or 1.8 per cent, to 5,519.6 - a six month low . The blue-chip index has lost 10 per cent since reaching a five-and-half year high in April.
After a cautious start, European equity markets struggled to make a meaningful recovery by lunchtime.
The FTSE Eurofirst 300 edged up 0.7 points or 0.1 per cent to 1,239.42 while the German Xetra Dax added 3 points or 0.1 per cent at 5,295.1 but the French CAC 40 declined 4.3 points or 0.1 per cent at 4,612.81.
On Tuesday, the FTSE Eurofirst 300 fell 2.1 per cent with the index down 11.9 per cent from its 2006 high in May.
In Tokyo, the Japanese market staged a modest recovery on Wednesday, after plunging more than 4 per cent on Tuesday to a new seven-month low. The Nikkei 225 gained 0.6 per cent at 14,309.56 by the close on Wednesday.
On Wall Street on Tuesday, US equities retreated after producer prices data added to concerns about mounting inflationary pressures.
By the close, the S&P 500 was down 1 per cent at 1,223.69, while the Nasdaq Composite lost 0.9 per cent at 2,072.47. The Dow Jones Industrial Average fell 0.8 per cent to 10,706.14, its lowest level this year.
The Federal Reserve is due to hold its next interest rate setting meeting at the end of the month. Economists are still divided over whether the Fed will opt for a pause in monetary tightening after sixteen consecutive monthly rate rises or whether it will raise interest rates to 5.25 per cent in response to increasing inflationary dangers. However, a rate rise is increasingly priced in by money markets which have greater conviction d the Fed will have to move and the inflation data due out today could force its hand.
Attention will focus on the core CPI measure (excluding food and energy prices). The consensus forecast points to a rise of 0.3 per cent in May which would leave the year-on-year growth rate at 2.3 per cent, above the Fed’s comfort zone for maintaining price stability.
“A figure of 0.3 per cent or more should extend the dollar to fresh multi week highs for), while a rise of 0.2 per cent should temper the dollar’s overall gains and may even lead to a modest profit taking,” said Ashraf Laidi, chief currency analyst at MG Financial Group.
The dollar has risen steadily for the past seven trading days, helped both by a rush for the exits from higher risk assets and by mounting expectations that the Federal Reserve has not yet finished raising rates.
The greenback has proved a safe haven amid the current financial storm as a swathe of emerging market currencies sold-off on Tuesday, as currency weakness spread across Indonesia, South Africa, Poland, Turkey, Iceland and Chile.
Both the US and European bond markets made gains on Tuesday as rising levels of risk aversion prompted investors to turn to fixed income in response to stock market weakness.