LONDON – Global shares dropped on Monday after Russian missiles pounded cities across Ukraine and as renewed concern about the economic outlook sent investors into safe-haven assets such as the dollar and bonds.
Any belief that the Federal Reserve will shift to a softer stance toward monetary policy was extinguished on Friday by data that showed US unemployment fell in September, pointing to a persistently tight labour market.
The dollar held steady against a basket of currencies, while a number of market-based measures of investor risk nervousness showed another increase.
The Russian missiles killed civilians and knocked out power and heat in cites across Ukraine in apparent revenge strikes after President Vladimir Putin declared a blast on Russia’s bridge to Crimea to be a terrorist attack.
“I had wondered if markets were looking at the situation in Ukraine and thinking this was moving us toward an end – which was what the first reaction was to the progress that the Ukrainian army had made in the summer. That reaction is no longer happening and this is clearly seen as just an increase in tension, rather than the end of anything,” Societe Generale’s head of currency strategy, Kit Juckes, said.
“We’ve got geopolitical tensions and we’re still on track towards tighter monetary policy in the States and the concern is still by the time they finished tightening, will they have tightened too much and leave the economy looking pretty vulnerable?,” Juckes added.
The MSCI All-World index was last 0.4 lower, down for a fourth day in a row. The pan-European STOXX 600 fell 0.2 percent, having skimmed one-week lows, while the FTSE 100 fell 0.4 percent.
S&P 500 futures fell 0.3 percent, while those on the Nasdaq lost 0.4 percent.
Wall Street sank on Friday after the upbeat payrolls report cemented expectations for another large rate hike.
Futures imply a more than 80 percent chance of rates rising by 75 basis points next month, while the European Central Bank (ECB) is expected to match that and the Bank of England to hike by at least 100 basis points.
Core measure
U.S. consumer inflation is expected to have moderated to an annual 8.1 percent, but the core measure is forecast to have accelerated to 6.5 percent from 6.3 percent. The U.S. CPI data is due on Thursday.
“Whether one number should be the basis for huge swings in markets, it seems inevitable that a notable miss on core on either side could bring about big moves in trading over the coming weeks, so stand by,” Deutsche Bank strategist Jim Reid said.
Minutes of the Fed’s last policy meeting will also be published this week and could offer a steer on rate-setters’ thinking about the likely path of monetary policy.
Bonds gain
Although U.S. inflation and the Fed’s response to it remain front and centre of investors’ minds, euro zone government bonds got a boost from the pickup in investor risk aversion.
German 10-year Bund yields, which serve as the region’s benchmark, were steady around 2.195 percent, while the more sensitive 2-year Schatz fell 7 bps to 1.795 percent.
Adding another note of caution was a 2 percent drop in Chinese blue-chip stocks following a survey that showed the first contraction in services activity in four months.
Corporate earnings also kick off on Friday, with JPMorgan, Citi, Wells Fargo and Morgan Stanley reporting results.
The dollar index rose 0.2 percent to 113.06, leaving the euro down 0.3 percent at $0.9707 and the yen flat at 145.465, a whisker away from the recent 24-year high of 145.90 that prompted Japanese intervention.
Sterling fell 0.2 percent to $1.1066, after the Bank of England announced a surprise decision to shore up the gilt market ahead of the end of an emergency bond-buying programme on Friday and the government brought forward the publication of independent budget forecasts.
Oil fell for the first time in a week, as investors took profit on last week’s 11 percent rally after a deal on supply reductions by OPEC+.
Brent fell 0.6 percent to $97.30 a barrel, while U.S. crude dropped 0.5 percent to $92.14 a barrel.