European government bonds knocked by inflationary pressures

European stocks softened and government bonds dropped on Monday, as rising gas prices compounded questions about inflation ahead of US consumer price data later in the week.

The regional Stoxx Europe 600 share index fell 0.4 per cent in early dealings, taking it more than 4 per cent below its all-time high reached in late August before surging energy prices took the shine off an earnings rebound from a eurozone recession last year. London’s FTSE 100 traded flat.

European gas contracts for November delivery rose 7.5 per cent to €90 per megawatt hour, remaining below the record of €117.5 they hit last week before Russian president Vladimir Putin signalled that the country could increase supplies.

Brent crude, the international oil benchmark, rose 1.4 per cent to $83.5 a barrel, around its highest in three years.

The yield on the UK’s 10-year gilt, which moves inversely to its price and acts as a benchmark for the nation’s borrowing costs, rose 0.06 per cent to 1.215 per cent, its highest point since May 2019.

Sterling gained 0.3 per cent against the dollar to $1.365 as traders gambled on the Bank of England raising interest rates to tackle spiralling energy costs, on top of the inflationary pressures of a worker shortage that a labour market report due on Tuesday will detail further.

Economists polled by Reuters expect data published on Wednesday to show US consumer prices rose 5.3 per cent in September from the same time last year, marking the fourth consecutive month the headline inflation rate in the world’s largest economy has topped 5 per cent.

Investors will scrutinise third-quarter earnings reports out this week from major US banks and consumer-facing businesses such as Delta Air Lines and Walgreens Boots, looking for clues about the effects of high energy prices and pandemic-related supply chain bottlenecks on corporate costs and consumer spending.

“The big questions for this week are not only the rate of inflation but also what levels of costs are companies now able to pass to the consumer,” said Aneeka Gupta, research director at ETF provider WisdomTree.

“The risk is the profit cycle gets eroded,” she added, while rising prices made the US and Eurozone central banks less comfortable about maintaining record-low interest rates.

The yield on Germany’s 10-year Bund rose 0.02 percentage points to minus 0.126 per cent, its highest point since May. The equivalent French yield added 0.05 percentage points to 0.209 per cent.

In Asia, Hong Kong’s Hang Seng share index rose 1.9 per cent, driven up by Chinese technology stocks as investors hoped the Beijing government would ease a regulatory crackdown on the sector.

China’s antitrust regulator last Friday fined online food delivery group Meituan Rmb3.4bn ($530m) for abusing its market position. But the penalty was lower than analysts had expected.

Futures markets indicated that the S&P 500 share index would fall 0.3 per cent in early New York dealings while the technology-heavy Nasdaq Composite would lose 0.45 per cent. US bond markets were closed for Columbus Day.

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