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Stocks and bonds tumble as hawkish central banks dash pivot hopes


World stocks were stuck near one-month lows and government bond markets came under fresh selling pressure on Friday, a day after a slew of central banks jacked up interest rates and signalled that the fight to tame inflation was not over yet.

Interest rates went up in the euro area, Britain, Switzerland, Denmark, Norway, Mexico and Taiwan on Thursday, following a U.S. rate hike a day before, and central bankers vowed to keep raising rates to bring down prices.

This week’s hawkish message from the likes of the European Central Bank and the Federal Reserve brought an abrupt end to optimism that peak rate is almost here.

European stock markets opened lower (.STOXX) and U.S. stock futures were in the red , , pointing to more pain for Wall Street where major indices on Thursday suffered their biggest daily percentage drop in weeks.

In Asia, Japan’s Nikkei index closed at its lowest in more than a month (.N225) and MSCI’s broadest index of Asia-Pacific shares outside Japan (.MIAPJ0000PUS) was set for its worst week in two months.

All this left MSCI’s world stock index (.MIWD00000PUS) languishing nears its lowest levels in almost a month.

“Central banks delivered a blow to markets that were rebounding in anticipation of policymakers turning dovish on inflation and interest rates,” said Sunil Krishnan, head of multi-asset at Aviva Investors.

The ECB delivered a 50-bps hike like the Fed. Both opted for a smaller increase this time, but flagged there were more increases to come.

Its hawkish message triggered a second day of heavy selling across European bond markets where yields on benchmark 10-year bonds jumped as much as 14 bps , .

The yield on Germany’s rate-sensitive two-year bond yield rose to 2.5% , its highest level since 2008.

The closely-watched gap between Italian and German bond yields widened to 215 bps , while Germany’s yield curve pushed deeper into inverted territory in a sign that investors were positioning for a sharp growth slowdown.

British bond yields also jumped and U.S. Treasury yields edged higher in London trade .

“We now expect the ECB to go to 3.25% (including 50 bps in March) and the Fed to 5.25% which argues for persistent pressure on yields and spreads,” said Christoph Rieger, head of rates and credit research at Commerzbank.

In China, where markets are churning around an uncertain reopening, relief at the apparent resolution of a long-running accounting access dispute with the United States was not enough to bolster sentiment.

A first snapshot of business activity in Europe also provided some positive signs.

A downturn in German economic activity eased for the second straight month in December, with S&P’s Global’s flash composite Purchasing Managers’ Index rising to 48.9 in December from 46.3 in November.

Meanwhile, Japan’s manufacturing activity shrank at the fastest pace in more than two years in December, while U.S. retail sales fell more than expected in November.

The prospect of further monetary tightening globally kept investors nervous about longer-run growth.

In currency markets, the dollar slipped, giving back some of the previous session’s strong gains.

The dollar index , which gauges the currency against six major peers, edged lower to 104.45. That followed a 0.85% surge overnight, its biggest since late September.

The euro was 0.25% firmer at $1.0655 , while the dollar was almost 0.7% weaker at 136.85 yen.

Gold was steady around $1,776 an ounce. Oil gave back some recent gains with Brent crude futures down 1.3% at $80.22 a barrel.

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