CENTRAL BANKS FACE INFLATION CONUNDRUM
The wave of market selling swept over Wall Street as S&P 500 futures shed 2.1 per cent, while Nasdaq futures dived 2.5 per cent.
Over in Europe, EUROSTOXX 50 futures and DAX futures both slid 3.2 per cent, while FTSE futures dropped 1.7 per cent.
In bond markets, the risk of rising inflation outweighed safe-haven considerations to shove yields higher globally.
Yields on 10-year Treasury notes rose 6 basis points to 4.204 per cent, up from a trough of 3.926 per cent just a week ago.
Interest rate futures slipped as investors feared the risk of higher inflation would make it harder for the Federal Reserve to ease policy, even though disappointing jobs numbers seemed to argue for stimulus.
Data on US consumer prices due on Wednesday is forecast to show the annual pace holding at 2.4 per cent in February.
The Fed’s preferred measure of core inflation is out on Friday and is forecast to hold at 3 per cent, well above the central bank’s 2 per cent target, and analysts see a risk of an even higher number.
The danger of energy-driven inflation has led markets to wager that the next move in rates from the European Central Bank could be up, possibly as early as June.
For the Bank of England, markets have shifted to pricing just a 40 per cent chance of one more easing, compared with two cuts or more before the Middle East conflict started.
Nervous investors sought the liquidity of dollars while shunning currencies from countries that are net energy importers, including Japan and much of Europe.
“Asia takes the brunt of the sharp escalation in oil prices and there are few places to run and hide,” said Vishnu Varathan, head of macro research for Asia ex-Japan at Mizuho.
“The dollar has to be the one outperforming, given Japan and Korea’s exposures here and the sharp pain that can be expected from Brent at US$107.”
The dollar added 0.5 per cent to 158.64 yen, while the euro slipped 0.9 per cent to US$1.1514.
The Australian dollar, often sold as a hedge during periods of market volatility, skidded 0.9 per cent to US$0.6964.
Gold fell 1.8 per cent to US$5,075 an ounce, with dealers speculating that investors were having to book profits made on the metal’s long climb to cover losses elsewhere.