FTSE and European stocks slump as eurozone inflation hits record high

President of European Central Bank (ECB) Christine Lagarde speaks during a news conference following the ECB's monetary policy meeting, in Frankfurt, Germany, July 21, 2022. REUTERS/Wolfgang Rattay
President of European Central Bank Christine Lagarde: Eurostat said Euro area annual inflation jumped to 9.1% in August from 8.9% in July. Photograph: Reuters/Wolfgang Rattay

European stock markets headed lower on Wednesday as eurozone inflation hits a record high of 9.1%.

In London, the FTSE 100 (^FTSE) was 1% lower bythe end of the day, amid the threat of a looming recession, while the French CAC (^FCHI) lost 1.1%, and the DAX (^GDAXI) was 0.7% down in Frankfurt.

According to flash estimate from Eurostat, the statistical office of the European Union, Euro area annual inflation jumped in August from 8.9% in July.

It was higher than economists' forecast of 9.0%, as inflation in the single currency bloc heads towards double-digit levels for the first time since the euro was introduced.

Meanwhile, Russia stopped gas flows through the Nord Stream 1 pipeline to the bloc on Wednesday with Gazprom starting three days of planned maintenance on the line.

Russia has already been accused of weaponising gas supplies to Europe and fuelling a cost of living crisis in retaliation for western sanctions due to its invasion of Ukraine.

Gas prices have more than doubled since Gazprom started restricting supplies on Nord Stream 1 in June.

Read more: Energy prices could push UK inflation to 22%, a near post-war record

Elsewhere, UK 10-year bonds are heading for the biggest monthly fall since September 1986 thanks to soaring energy prices.

The yield, or interest rate, on 10-year gilts has risen to 2.747%, up from 1.84% at the end of July, as investors demanded a higher rate of return for holding UK debt.

Shorter-dated two-year UK gilts touched the highest since October 2008, when the financial crisis erupted.

Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown, said: "The summer euphoria continues to be squeezed out of the stock markets, as investors tread more carefully, anxious about the implications of a fast pace of hikes in interest rates.

"Another negative session on Wall Street spilled over into trading in Asia and there has been a lacklustre start for the FTSE 100 which fell back in early trade. That’s despite continued weakness in sterling, which would ordinarily help boost the internationally focused index.

"The pound (GBPUSD=X) is still trading only a notch above $1.16, at lows not seen since at the start of the pandemic amid worries about the worsening outlook for the UK economy."

Read more: UK business confidence plummets amid rising inflation

Across the pond on Wall Street, the S&P 500 (^GSPC) fell 0.2% and the tech-heavy Nasdaq (^IXIC) lost 0.1%,despite a slight rebound after opening. The Dow Jones (^DJI) dipped 0.2% at the time of the European close.

It came as US firms slowed their hiring in August for the second month in a row.

Private jobs increased by 132,000 during the period, less than half the pace of July, when firms hired nearly 270,000 workers.

Nela Richardson, chief economist at ADP, which compiled the data, said: "Our data suggests a shift toward a more conservative pace of hiring, possibly as companies try to decipher the economy's conflicting signals.

"We could be at an inflection point, from super-charged job gains to something more normal."

US stocks fell for a third straight day on Tuesday as hawkish rhetoric from last week’s economic conference in Jackson Hole fuelled expectations of higher interest rates.

Watch: How does inflation affect interest rates?

“Further comments from a Federal Reserve official suggested that not only should rates in the US rise above 3.5% this year, but any cuts next year were also unlikely,” Richard Hunter, head of markets at Interactive Investor, said.

“This was followed by the JOLTS report on job openings, reportedly a measure of interest to the Fed, which highlighted extremely tight labour conditions.

“With the non-farm payrolls to come at the end of the week, any further strength would underline the Fed’s resolve to plough on with aggressive tightening against a backdrop of an economy which seems for the moment relatively unaffected by the hikes so far.”

In the year to date, the Dow Jones is now down by around 12%, while the S&P 500 and Nasdaq have lost 16% and 24% respectively.

Stocks in Asia were mixed on Wednesday, with the benchmark Nikkei (^N225) index down 0.4% on the day, while the Hang Seng (^HSI) rose 0.1% and the Shanghai Composite (000001.SS) dipped 0.8%.

In China, factory activity fell less than expected this month, however, the outlook remains challenging amid an embattled property sector and continued lockdowns.

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