By Tommy Wilkes
LONDON (Reuters) -Stock markets headed for their seventh consecutive month of gains on Tuesday with investors largely convinced that an economic rebound and plentiful stimulus will keep the rally going for now.
After an initial surge to new record highs, however, stocks were down by 1130 GMT after higher-than-expected euro zone inflation data and reports that a European Central Bank policymaker said the bank was in a position to think about paring back its pandemic-era stimulus — reminders that stocks are vulnerable to signs of reduced policy support.
The pan-European STOXX 600 index initially gained 0.2% but fell after media reported the comments by ECB Governing Council member Robert Holzmann and was last down 0.3%.
Adding to the nervousness was data showing euro zone inflation surged in August to a 10-year-high, significantly above the ECB target, with further rises likely to come.
Wall Street futures clung to positive territory ahead of the U.S. open and after hitting record highs on Monday.
The MSCI world equity index, which tracks shares in 50 countries, rose 0.21% as gains in Asia and the U.S. overnight offset the European weakness. Many investors remain bullish.
“While risks remain, and investors should reflect this in their portfolios, we believe the backdrop for equities remains positive, and we advise investors to position for reopening and recovery. We advise investors to position in stocks that should benefit from strong economic growth,” said Mark Haefele, Chief Investment Officer, UBS Global Wealth Management.
Rising cases of the COVID-19 Delta variant have hurt Asian shares in recent weeks but have mostly been ignored by European and U.S. markets.
Outside of stocks, the dollar, a safe-haven currency and barometer of risk sentiment, fell to a three-week low, down 0.3% on the day at 92.424.
The greenback had added to losses on Friday after Federal Reserve Jerome Powell sounded a more dovish-than-expected tone at the annual Jackson Hole symposium.
“Powell offered no concrete taper signals and made it clear that the Fed was in no rush to raise interest rates, despite the recent spike in inflation,” said Lukman Otunuga, Senior Research Analyst at FXTM, noting that the dollar was down against all G10 currencies on Tuesday.
The euro rose 0.4% to $1.1841, extending its gains after the inflation data to its strongest since Aug. 5.
Chinese shares endured another volatile session after disappointing economic readings and renewed worries about regulatory clampdowns.
Data showed that China’s businesses and the broader economy came under increasing pressure in August as factory activity expanded at a slower pace, while activity in the services sector contracted.
Tech indices and stocks fell again after Beijing on Monday cut the amount of time players under the age of 18 can spend on online games to one hour on Fridays, weekends and holidays.
The CSI information technology sub-index dropped 1.86%. The ChiNext Composite start-up board was 1.76% weaker and Shanghai’s tech-focused STAR50 index fell 2%.
But Asian shares more broadly recovered. MSCI’s gauge of Asia Pacific stocks outside Japan was up 1.4%, while Japan’s Nikkei 225 bounced back to stand 1.1% higher despite weak July industrial output data.
Oil prices fell on concerns that power outages and flooding in Louisiana after Hurricane Ida would cut crude demand from refineries at the same time that global producers plan to raise output.
U.S. crude fell 52 cents to at $68.69 a barrel. Brent fell 56 cents to to $72.85 a barrel, although it was off its weakest of the day as Hurricane Ida weakened into a Category 1 hurricane within 12 hours of coming ashore as a Category 4.
Euro zone government bond yields rose after data showed consumer prices in the region rose by 3% this month, after increasing by 2.2% in July, far above expectations for 2.7% and moving well clear of the European Central Bank’s 2% target.
The benchmark 10-year German yield climbed above -0.4% for the first time in a month.
U.S. Treasury yields were little changed.
Investors are now preparing for crucial data on the state of the U.S. jobs market due out later in the week.
Stocks sit near record highs after August surge