Stocks drop as inflation fears mount, eyes on ECB

LONDON — Equity markets mostly fell Thursday as inflation fears gain momentum, with all eyes on the outcome of a European Central Bank (ECB) policy meeting aimed at tackling soaring consumer prices in the eurozone.

The ECB is expected to announce the end date to its bond-buying stimulus, as concerns over the accelerating pace of inflation in the eurozone grip policymakers.

The stop is a prelude to the ECB hiking interest rates for the first time in more than a decade, following in the footsteps of other central banks who are raising borrowing costs.

In foreign exchange, the euro steadied against the dollar and pound.

"There is a sense of nervousness ahead of the ECB's interest rate decision later today as the central bank looks to usher in a new era of monetary policy tightening," noted Victoria Scholar, head of investment at Interactive Investor. 

"With euro-area inflation hitting a record high in May, the ECB is widely anticipated to begin hiking rates in July."

Inflation around the world has reached the highest levels in decades, fuelled largely by soaring oil and gas prices.

Energy demand has surged as economies emerge from pandemic lockdowns, while supplies have been hit by the invasion of Ukraine by major producer Russia. 

Traders were also awaiting US inflation data due Friday.

Analysts expect the Federal Reserve to stick to its hawkish path and hike US interest rates by half a point for at least three more meetings this year as it tries to bring down American consumer prices.

"Until we reach peak inflation, which will trigger a less hawkish Fed and lower recession odds, it could be a gloomy summer for global stock pickers," forecast SPI Asset Management's Stephen Innes. 

There was fresh uncertainty over the economic outlook in China as COVID fears linger over the world's second-biggest economy.

While data showed China's exports rebounded strongly in May, with factories restarting and supply chains untangling as Shanghai slowly emerged from a gruelling lockdown, the metropolis will Saturday shut a district of 2.7 million people for mass coronavirus testing.

"There are lingering concerns that China's brisk recovery could be a false dawn given that the zero-COVID strategy is staying firmly in place and that could mean rolling lockdowns will continue," noted Hargreaves Lansdown analyst Susannah Streeter.