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Inflation fears drag global stock markets down

LONDON – ASIAN and European stocks tumbled yesterday as last week’s strong United States inflation data reduced expectations that the US Federal Reserve would deliver further interest rate cuts soon.

Also, in a sign that rising food and agricultural prices may push inflation up globally, US wheat futures surged more than 3 per cent and surpassed US$10 a bushel for the first time.

Investors took their cue from Wall Street’s sell-off last Friday in the wake of unexpectedly strong inflation figures.

US consumer prices jumped 0.8 per cent last month. On a 12- month basis, inflation hit 4.3 per cent, the fastest since June last year. New York’s Dow Jones Industrial Average tumbled 1.32 per cent last Friday in a volatile session as the price data raised fears of stagflation – a combination of slower growth and stubborn inflation pressures.

Inflation concerns generally weigh on equities as they erode corporate profits.

They are also nagging the world’s central banks as they wrestle with persistent tensions in money markets, which are showing only modest signs of easing after policymakers announced a plan last week to inject liquidity. The plan started yesterday.

Markets are now pricing in around a 78 per cent chance of a January Fed cut in benchmark interest rates to 4 per cent, which will follow three easing moves since the credit crisis broke in August.

Earlier this month, markets fully priced in a cut.

Developments in money markets are key in a week when investors will receive more evidence of how the financial sector is coping with the US sub-prime mortgage fallout as major US banks release quarterly earnings.

In morning trade, London’s FTSE 100 index of leading shares dropped 1.44 per cent, while Frankfurt’s DAX 30 slid 1.2 per cent, and Paris’ CAC 40 shed 1.88 per cent.

Earlier in Asia, Tokyo closed down 1.7 per cent, Hong Kong slumped 3.51 per cent, Seoul shed 2.9 per cent, Shanghai gave up 2.6 per cent, and Mumbai lost 3.8 per cent.

 

Source: REUTERS, AGENCE FRANCE-PRESSE (The Straits Times 18 Dec 07)

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