Stocks slide ahead of U.S. inflation data and earnings headwinds

People walk past an electronic screen showing Japan’s Nikkei stock price index inside a conference room in Tokyo, Japan June 14, 2022. REUTERS/Issei Kato

SYDNEY/LONDON, July 11 (Reuters) – Shares fell on Monday as investors braced for a U.S. inflation report that could force another massive interest rate hike and the start of a earnings season in which earnings will be under pressure.

The STOXX index of European stocks fell 1.3% (.STOXX), S&P 500 futures fell 0.8% and Nasdaq futures fell 0.9%, as a An upbeat report on US payrolls in June prompted expectations of a 75 basis point hike from the Federal Reserve.

MSCI’s broadest index of non-Japan Asia-Pacific stocks (.MIAPJ0000PUS) fell 1.8%, while China’s blue chips (.CSI300) lost 1.9% after Shanghai uncovered a case of COVID-19 involving a new sub-variant, Omicron BA.5.2.1. Read more

Bond yields and the creeping US dollar also rose, with the latter hitting a 24-year high against the yen.

Underscoring the global nature of the inflation challenge, central banks in Canada and New Zealand are expected to tighten policy further this week.

While Wall Street made some gains last week, market sentiment will be tested by earnings from JPMorgan and Morgan Stanley on Thursday, with Citigroup and Wells Fargo the next day.

Another hurdle will be Wednesday’s US consumer price report, in which markets see headline inflation accelerating to 8.8% but a slight slowdown in the baseline measure to 5.8% .

A first reading on consumer inflation expectations this week will also hold the Fed’s attention.

“Unexpected weakness in these releases will be needed to dislodge expectations of a 75 basis point Fed rate hike on July 27, which fell from around 71 basis points to 74 basis points after the report on payroll,” said Ray Attrill, head of FX strategy at NAB.

PARITY PARTY

Treasury yields climbed about 10 basis points on the jobs report and the 10-year settled at 3.09% on Monday, from a recent low of 2.746%.

A hawkish Fed combined with recession fears, particularly in Europe, kept the dollar at 20-year highs against a basket of competitors . The dollar broke above 137.00 to hit its highest since 1998 at 137.28 yen as the Bank of Japan remained dovish. Read more

Japan’s conservative coalition government is expected to have increased its majority in upper house elections on Sunday, two days after the assassination of former Prime Minister Shinzo Abe. Read more

The euro continued to struggle at $1.0122, after losing 2.4% last week to hit a two-decade low and a major retracement target at $1.0072.

“With little economic relief on the horizon for Europe and US inflation data likely to mark a new high for the year and keep the Fed aggressively higher, we believe risks remain biased in favor greenback,” said Jonas Goltermann, a senior market economist at Capital Economics.

“Indeed, we believe that the EUR/USD rate will cross parity soon, and could well trade down to this level.”

Rising interest rates and a strong dollar were a headache for non-performing gold, which was hurting at $1,739 an ounce after falling for four straight weeks.

Oil prices also fell around 4% last week as demand concerns offset supply constraints.

Data from China due Friday is expected to confirm that the world’s second-largest economy contracted sharply in the second quarter amid a coronavirus lockdown.

Brent was trading lower $1.27 at $105.76, while U.S. crude slid $1.43 to $103.36 a barrel.

Reporting by Wayne Cole and Lawrence White; Editing by Kenneth Maxwell, Bradley Perrett and Kirsten Donovan

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