A new trough in euro zone inflation pushed the euro to a two-year low on Tuesday, leaving the dollar on course for its biggest quarterly gain in six years and world stocks facing their largest drop since the peak of the euro crisis.
Falling food and energy prices saw euro zone inflation slow to 0.3 percent this month, piling the pressure on the European Central Bank to make clear when it meets Thursday that it is ready to take more preventative action, Reuters reported.
World markets had already been in a hesitant mood as investors wondered what China’s response would be to civil unrest in Hong Kong, and as the dollar’s strength dominated the end of what has been a choppy third quarter.
On a broader scale, MSCI’s 45-country All World stock index, was on course for a drop of almost 3 percent on the month and its biggest quarterly fall since Q2 2012, when the euro zone’s debt crisis was at its most intense.
The new low in euro zone inflation kicked the euro below $1.26 for the first time since September 2012 and although the region’s stocks got a minor lift from ECB easing bets the impact was limited.
The FTSEurofirst 300 index of top European shares was last up 0.5 percent at 1,379 points on the day, but it was barely changed on the month while the euro was staring at its biggest monthly drop since February 2013.
German government bonds, Europe’s benchmark in the fixed income market, were also heading for their first rise in yields -- a measure of the interest markets charge governments to borrow -- in seven months.
HONG KONG
The unrest in Hong Kong was an added complication for investors amid long-standing concerns about the health of China’s economy.
An HSBC survey of manufacturing (PMI) for September disappointed slightly by showing a final reading of 50.2, steady on August but down from its preliminary 50.5.One bright spot was a measure of new export orders which climbed to a 4-1/2-year-high of 54.5. The official version of the PMI is due on Wednesday.
Chinese shares have been less troubled by events in Hong Kong, perhaps because news and images of the protests are hard to come by on the mainland. The Shanghai index inched up 0.1 percent to near a 19-month peak.
“We think the risks to growth are still on the downside and warrant more accommodative monetary as well as fiscal policies,” said Qu Hongbin, chief economist for China at HSBC.
