Stock markets lost all impetus on Wednesday after a data release confirmed that European inflation stepped up once again in August, putting pressure on the European Central Bank to raise interest rates even more aggressively at its policy meeting next week.
The ECB raised its key interest rate by half a percentage point - 50 basis points - in July, but the market is now looking for a 75-point hike this time around.
The FTSE 100 index was down 93.92 points, or 1.3%, at 7,267.71 on Wednesday at midday. The mid-cap FTSE 250 index was down 109.28 points, or 0.6%, at 19,040.37. The AIM All-Share index was down 5.36 points, or 0.6%, at 881.95.
The Cboe UK 100 index was down 1.2% at 726.10. The Cboe 250 was down 0.6% at 16,338.50, and the Cboe Small Companies down 0.1% at 13,913.14.
In mainland Europe, the CAC 40 in Paris was down 0.8%, while the DAX 40 in Frankfurt was down 0.5%.
The annual eurozone inflation rate hit a fresh high of 9.1% in August. July’s inflation rate was 8.9%. August’s rate was expected to edge up to 9.0%, according to FXStreet.
Energy prices remained elevated, though the increase eased nominally to 38% in August from 40% in July. Food, alcohol & tobacco prices ticked up, rising 11% versus 9.8% in July.
Core inflation - which strips out energy, food, alcohol and tobacco - accelerated to an annual rate of 4.3% in August from 4.0% in July. A year ago, the rate was 1.6%.
Economists at ING commented that this increase in core inflation will be the ‘key concern’ for the ECB meeting on Thursday next week.
‘Another hike of at least 50 basis points in September seems to be a done deal, with the hawks pushing for 75bp. The big question is how the ECB will respond after this, if indeed signs of economic distress become more apparent, and inflation remains highly driven by supply-side factors,’ said ING.
Jack Allen-Reynolds, senior Europe economist at Capital Economics, agreed: ‘The further increases in headline and core inflation in August, and likelihood that they will keep rising, will add to the pressure on the ECB to step up the pace of tightening. The balance of probabilities is shifting towards a 75bp hike next week.’
The euro fell in the wake of the inflation data, trading at $0.9986 on Wednesday, down from $1.0022 late Tuesday.
The single currency also was hit after Russian energy giant Gazprom on Wednesday cut off its gas supplies to Germany via the Nord Stream 1 pipeline for maintenance work. Germany’s Federal Network Agency chief Klaus Mueller has called it a ‘technically incomprehensible’ decision, warning that it was likely just a pretext by Moscow to wield energy supplies as a threat.
Sterling was quoted at $1.1626, lower than $1.1662 at the London equities close on Tuesday, as the risk-off mood gripped markets and lifted the dollar. Against the yen, the dollar reversed morning losses to trade at JP¥138.83, firm from JP¥138.75.
Precious metal gold also came under pressure from the stronger dollar. Gold was quoted at $1,711.86 an ounce, below $1,725.60 late on Tuesday.
And oil prices extended recent losses as expectations of further central bank tightening fuelled recession worries. Brent oil was trading at $96.18 a barrel, down from $99.99 late Tuesday and nearly $10 below this week’s peak above $105.
The retreat in oil prices led to share weakness for London-listed energy majors Shell and BP, down 3.4% and 3.2% respectively. Tullow Oil was the worst performer in the FTSE 250, down 6.5%.
Elsewhere among mid-caps, LondonMetric was down 3.3%. Berenberg cut the property investor to ‘sell’ from ‘hold’ as part of a comprehensive note on the real estate sector.
‘The environment is certainly the toughest in over a decade...Our headline view is hence that these macroeconomic factors will set the tone for the sector and that we expect sentiment to remain weak,’ said Berenberg.
Elsewhere, shares in Cake Box tumbled 39% after warning on full-year profit.
The eggless cakes maker said inflationary pressure has increased, and it has only managed to pass part of this onto franchisees, meaning its full-year gross margin will be hit. This has been compounded by weaker-than-expected sales at the franchise level during July and August.
‘Accordingly, due to the worsening outlook and increasing cost of living pressures on the consumer, the group now expects full year profitability to be significantly below current market forecasts,’ Cake Box said, adding that it does not expect inflationary pressures to ease up before the end of its financial year next March.
Wall Street was mostly on track for a lower start. The Dow Jones was called down 0.2% and the S&P 500 down 0.1%, though the Nasdaq Composite was pointed up 0.2%.
The international economic calendar has the return of US ADP employment data, due at 1315 BST.
The ADP report serves as a precursor to Friday’s nonfarm payrolls. The US economy is expected to have added 300,000 jobs in August, down from 528,000 in July, according to FXStreet.
The ADP report last covered the month of May. In that release, it said private sector employment increased by 128,000 - well below the nonfarm payrolls figure of 386,000 reported later that week. Its release then was suspended.
‘The report had been temporarily discontinued after the May release, and will now resume with an updated methodology and a wider range of data (including additional information on wages). It will be interesting to see whether the alleged higher accuracy of the new APD index will trigger a larger-than-normal market reaction,’ said ING.
ADP promises the new reformulated report will be a ‘a more robust, high-frequency view of the labour market’.
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