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Title: 'New shock' for European markets as gas price spike fuels inflation fears

Aug 24, 2022 02:10AM ET

By: AnalysisWatch

Another sharp jump in natural gas prices appears to have ended hopes that Europe's inflation fight will ease, with financial markets now bracing for higher prices, a faster pace of interest rate rises and a deeper economic downturn.

Just a few weeks ago, signs that inflation in the United States—which usually leads the world's economic changes—could be peaking drove up stock values and lowered government borrowing costs. Investors have bet that central banks will now pay more attention to slowing economies as the peak of the rate hike cycle approaches.

Instead, this week began with the US bank Citi forecasting that UK inflation would reach a near half-century high of 18.6 per cent by January-a forecast that dominated the front pages of British newspapers on Tuesday.

Petrol prices jumped by almost 40% in August and by almost 300% this year.

So it is not surprising that the mood is rapidly deteriorating. Global equities are down 4.3% from last Tuesday's three-and-a-half month high, the euro is back below $1, and the yield on 10-year Treasuries is back to 3%.

One of the long-term measures monitored by the European Central Bank in the euro zone rose to 2.24% on Tuesday after falling below the ECB's 2% target in July.

In Britain, a similar measure of inflation rose to 3.82% this week from 3.4% at the end of July.

The yield on two-year British government bonds, which is trading at its highest level since 2008, posted its biggest weekly jump since 2010 after data last week showed inflation hit 10.1% in July.

On Tuesday, investors were betting that the Bank of England would not stop raising interest rates until June 2023, when they would be around 4.2 percent. Ahead of the inflation reading, they expected a peak of 3.25% in March.

According to Refinitiv, markets have raised the point at which they think ECB rates will peak next year by about 50 basis points, to around 2%.

Inflation expectations are also rising in the US, but the outlook for Europe looks much bleaker.

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