LONDON (Reuters) – European shares were mixed on Wednesday and the dollar rebounded, while the 10-year U.S. Treasury stabilised below its 10-month high as markets focused on U.S. inflation data.
After Asian equities saw modest gains, European shares opened lower and struggled to make gains, with the pan-European STOXX 600 up 0.1% on the day at 1156 GMT, but London’s FTSE 100 and Germany’s DAX marginally in the red .
The MSCI world equity index, which tracks shares in 49 countries, was up 0.1%, edging back towards record highs, but MSCI’s main European Index was down by a similar amount.
Wall Street futures were also in the red, with S&P 500 e-minis down 0.1%.
“Inflation is the key number for us to watch today,” said Marija Veitmane, senior multi-asset strategist at State Street Global Markets.
“The market is very relaxed about it and should we get high inflation that would be a big pressure. The 10-year is probably the key variable to watch.”
“If you have a very strong positive surprise then you will probably start thinking about the Fed being a bit more aggressive in their intervention and pushing yields lower,” she said.
At the same time, investors are tracking the discussion around tapering – that is, the Federal Reserve’s possible easing of monetary stimulus.
Several Fed policymakers, including Loretta Mester, Esther George, James Bullard and Eric Rosengren, pushed back against the idea of the Fed tapering its asset purchases any time soon.
These comments, along with a well-received auction of 10-year Treasuries, pushed the U.S. 10-year yield down from the 10-month high of 1.187% reached in the previous session.
At 1200 GMT, the benchmark yield was at 1.1274%.
The yield curve, which had reached the steepest since May 2017 on expectations for big fiscal stimulus under a new Democratic administration, narrowed overnight but started to creep up in the European session, at 97.5 basis points.
“We believe the potential for fiscal stimulus, along with a normalization of economic activity as the vaccine rollout ramps up, justify slightly higher US Treasury yields,” UBS strategists wrote in a note to clients.
“To acknowledge this, we have raised our 10- and 30- year US Treasury yield forecasts by 0.1 percentage points this year to 1.0% and 1.7%, respectively, by end-December,” they said. They do not expect the run-up in yields to go much further than that, because central banks remain accommodative and the Fed has signalled a tolerance for higher inflation.
U.S. December inflation data is due at 1330 GMT.
The U.S. dollar recently broke its downward trend with a three-day winning streak, then resumed falling on Tuesday. It was steady overnight but rose again on Wednesday. At 1204 GMT, it was up 0.3% at 90.285 versus a basket of currencies.
In Europe, November industrial production data was better than expected.
European Central Bank President Christine Lagarde pushed back about economic pessimism, saying that the ECB’s December projections for a rebound are “still very clearly plausible”, so long as COVID-19 restrictions in Europe can be lifted from the second quarter of the year.
Euro zone government bond yields dipped. Italian bonds, which sold off on Tuesday due to political uncertainty, lagged behind Germany.
Versus the dollar, the euro was down around 0.3% at $1.21675 at 1209 GMT. Riskier currencies such as the Australian and New Zealand dollars also fell as the U.S. dollar strengthened .
Bitcoin edged up, but at $34,255 was still around 18% down from the record high of $42,000 it reached on Friday last week.
Oil prices steadied after an early jump when industry data showed a bigger-than-expected drop in inventories and investors shrugged off the impact of the pandemic.
Reporting by Elizabeth Howcroft; editing by William Maclean, Larry King