European stock markets recovered on Thursday afternoon, following sharp falls earlier in the session.
The FTSE 100 (^FTSE) was more than 2% lower in the morning but parred losses to -0.6% at the close. London’s benchmark index still ended below the 7,000 points mark but was off its lows of the day when it reached its worst level in 3 weeks.
The initial slump followed a sell-off in the US and Asia. The S&P 500 posted its worst day since February on Wednesday, while the Dow Jones saw its worst day since January. US 10-year yields closed at a six-week high amid concerns that the US economy might be at risk of overheating.
Read more: Why are investors worried about inflation?
Investors were spooked by higher-than-expected inflation data. The jump in US headline CPI to 4.2% was the biggest rise since 2008, largely driven by a 10% increase in the prices of used cars and trucks. It was more than double the Federal Reserve’s target.
Stock markets were also hit by a sharp reversal for commodity stocks on Thursday, which have been rallying in recent weeks. A string of mining companies and oil producers are among the fallers as ongoing inflation angst likewise hits asset prices.
"It seems that many players are simply moving to cash," Marios Hadjikyriacos of XM said. "Even commodities are trading lower, which implies there’s no place to hide for now.
"Super-loose monetary policy ignited a ‘buy everything’ wave, so perhaps it’s only natural to see a ‘sell everything’ reaction as the days of cheap money slowly draw to an end."
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Brent crude oil (BZ=F) was more than 2% lower at $67.68 on Thursday. Prices were pulled lower by the stronger dollar, which is used to price commodities, and the reopening of a crucial supply pipeline in the US.
Clothing retailer Burberry was amongst the laggards in London, down 4% on the day, despite sales climbing by almost a third due to strong demand in Asia and America. The performance helped limit the fall in annual revenues to 11%, with retail turnover down 9%.
The European reversal came as Wall Street indices rose for the first time in four days. The S&P 500 (^GSPC) jumped 1.07% and the tech-heavy Nasdaq (^IXIC) advanced 0.59%. The Dow Jones (^DJI) gained 1.25% at the time of the European close.
On Thursday it was revealed that the number of Americans filing new unemployment claims fell to a fresh pandemic low.
Around 473,000 initial claims for jobless support were filed last week on a seasonally adjusted basis, down from 507,000 in the previous week. This was the lowest reading since jobless claims surged back in mid-March 2020, in the first wave of COVID-19.
Elsewhere, US producer prices jumped 6.2% year-on-year.
“Fears about overheating seem somewhat premature at this time given the disruption wrought by the pandemic and the price disruptions of the past 12 months,” Michael Hewson of CMC Markets said.
Benchmarks in Shanghai, Tokyo, Hong Kong and Southeast Asia retreated overnight. The Shanghai Composite index (000001.SS) fell 0.96% while the Nikkei 225 in Tokyo (^N225) tumbled 2.49%. The Hang Seng in Hong Kong (^HSI) lost 1.39%.
Watch: What is inflation and why is it important?