Global markets muted as investors debate inflation outlook

European stocks moved modestly higher on Friday after three daily falls, as concerns over the prospect of rising inflation ripple through the capital markets.

In Europe, the region-wide Stoxx 600 was flat in early trading, before creeping up 0.2 per cent. London’s FTSE 100 benchmark moved sideways and Germany’s Xetra Dax was up 0.5 per cent.

The prospect of increased US stimulus has been received positively by investors in recent months, sending Wall Street to a series of record highs. But it is “important to assess what could change going forward”, said Kevin Thozet, member of the investment committee at asset manager Carmignac.

“The very force that has been pushing equities higher is starting to create inflation,” said Savvas Savouri, chief economist at Toscafund Asset Management.

US government debt has sold off since the election in November, on concerns that President Joe Biden’s $1.9tn planned stimulus will feed through to faster price rises, which erode the value of bonds’ coupons. That pushed the 10-year yield to a high of 1.33 per cent earlier this week, from just above 0.9 per cent at the start of the year.

On Friday, the 10-year yield was a fraction below 1.3 per cent. Nervousness over the knock-on for stocks drove Wall Street on Thursday to its first three-day losing streak this year. Concerns are rising that higher yields could undercut the rally in riskier assets, said Jim Reid, research strategist at Deutsche Bank. Futures markets implied the US blue-chip S&P 500 index would gain 0.2 per cent at the open.

Oil prices also lost steam, but still hovered near early 2020 levels. Brent crude, the international benchmark, fell 1.2 per cent to just above $63 a barrel.

According to Reid, prices were being weighed down by the recommencing of Texas oil production and news that the White House was willing to negotiate with Iran over a return to the nuclear deal, a move that could pave the way for a rise in the country’s crude exports.

Sterling rose 0.2 per cent against the dollar, briefly crossing $1.40 — its highest level since March 2018.

“Sterling has been undervalued since the period before the Brexit referendum, and now there is a general view that the UK is ahead of Europe in terms of its response to Covid-19,” said Savouri.

In Asia, China’s CSI 300 index gained 0.2 per cent, as did Hong Kong’s Hang Seng index, while South Korea’s Kospi 200 added 0.8 per cent.