European stocks were in the red on Wednesday following an earlier rally as investors digest UK chancellor Rishi Sunak’s Spring Statement and Britain’s latest inflation data.
The FTSE 100 (^FTSE) closed 0.2% lower as Sunak announced several measures including a 5p per litre fuel duty cut, a cut in the basic rate of income tax from 20% to 19% by 2024, and doubled household support fund to £1bn.
It comes after UK inflation hit a fresh 30-year high as household budgets come under more pressure and the cost of living crisis deepens.
UK consumer prices rose to 6.2% in the year to February, ahead of forecasts of 6% and up from 5.5% the month prior, according to new data from the Office for National Statistics (ONS). This was the highest inflation reading since March 1992, with monthly CPI increasing by 0.8% — the biggest monthly CPI surge between January and February since the financial crash.
Rising energy bills, fuel costs and food prices were the biggest drivers of the inflation surge. Electricity prices have soared 19.2% since April 2021. Gas prices pushed 28.3% higher in the last year.
Meanwhile, the retail price index hit its highest level in 31 years, hitting 8.2% in February.
Economists at the Bank of England previously forecast inflation could top 8% in April as Ofgem’s energy price cap rises by 54% next month.
Analysts expect the central bank to temper inflation by taking a more “assertive” stance when hiking interest rates.
“This is before the commodity chaos unleashed by the invasion of Ukraine fully shows up in the figures, so the expectation is that with inflation becoming hotter, the Bank of England will try and turn on the cold taps by raising rates more assertively,” said Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown.
Oil prices rose on Wednesday as a decline in US crude stockpiles fuelled market fears over tightening global supplies amid the Ukraine crisis. According to the American Petroleum Institute, crude inventories fell by 4.3 million barrels last week.
Russia also warned that supplies from one of the world’s biggest oil pipelines would be cut.
Across the pond, US benchmarks followed Europe’s lead and edged lower on Wednesday.
Wall Street’s S&P 500 (^GSPC) declined 25.15 points, or 0.6%, to 4486.46. The tech-heavy Nasdaq (^IXIC) drifted 0.2% lower after pushing to a one-month high on Tuesday, while the Dow Jones (^DJI) fell 0.8% at London’s close.
In government bond markets, the yield on the benchmark 10-year note (^TNX), which moves inversely to its price and underpins borrowing costs worldwide, jumped to 2.4%, nearing its highest level since May 2019.
It comes after Federal Reserve chair Jerome Powell struck a more hawkish tone on Monday. Powell stressed the uncertainty facing the central bank and that the Fed would adopt a more restrictive stance if needed after lifting interest rates from near zero last week.
“The relative insouciance of equity markets to rising yields could well be the perception that the Fed still has plenty of room to get the Fed funds rate back to its pre-pandemic levels of 1.5% to 1.75%,” said Michael Hewson, chief market analyst at CMC Markets.
“This may help explain why a 50bps hike in May is, along with another rise of similar magnitude being received calmly.”
Meanwhile, the Russian central bank said on Wednesday some stock market trading would resume on 24 March after a near month-long hiatus, with 33 securities set to be traded on the Moscow Exchange (IMOEX.ME) for a limited period of time and with short selling banned.
Asian stocks were in the green overnight with the Nikkei (^N225) rising 3% in Japan, while a tech rally pushed the Hang Seng (^HSI) index 1.3% higher in Hong Kong as China pledged to support financial markets. The Shanghai Composite (000001.SS) gained 0.3%.