Wall Street has headed for a weak start as investors reassessed their bets on recovery plays after the US Federal Reserve's hawkish stance further fuelled the dollar, while denting prices of commodities and other reflation plays.
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US stock futures were down 0.5 per cent to 0.7 per cent with losses accelerating an hour ahead of the market open, when St. Louis Federal Reserve president James Bullard told CNBC that inflation was more intense than expected.
Those comments sent the US dollar index to 92.074, the highest in more than two months, and US 10-year Treasury yields back above 1.5 per cent after Thursday's drop.
"It's a bit of dust settling, with no panic and the grown up reaction is encouraging," said Ned Rumpeltin, European Head of Currency Strategy at TD Securities.
While the Fed messaging on Wednesday indicated no clear end to supportive policy measures such as bond buying, signals of faster-than-expected rate hikes indicated its concern about inflation as the US economy recovers from the COVID-19 pandemic.
The comments led to moves like the US Treasury yield curve rolling over dramatically and sending the dollar higher, helping to suck momentum out of reflation trades that bet on recovery.
"The Fed was very important for market psychology and will continue to resonate for some time, but we knew it was coming and it was just a question of when after the US and global economies improved," Rumpeltin said.
Friday is also "quadruple witching day" on Wall Street when options and futures on stocks and stock indexes expire, which can trigger volatility in markets around the close.
"The popular explanation of the faltering of reflation trades is the belief that growth is peaking while the Fed will keep inflation in check," said Marija Vertimane, senior strategist at State Street Global Markets.
"We disagree and (are) happy to buy the dip in cyclical stocks," Vertimane said.
In Europe, the pan-European STOXX index of shares eased 0.75 per cent to 455.88 points, just below Monday's record high of 460.51.
The MSCI world equity index was off 0.23 per cent at 713.24 points after hitting a record high of 722.32 on Tuesday, while Paris and Frankfurt were down 0.6 per cent to 1 per cent.
Stocks in London fell 1.18 per cent after data showed British retail sales fell unexpectedly last month as a lifting of lockdown restrictions encouraged spending in restaurants rather than shops.
The US dollar was heading for its best week in nearly nine months as investors priced in a sooner-than-expected ending to extraordinary US monetary stimulus.
Strength in the greenback pushed oil lower for a second straight session, while spot gold remained down around 5 per cent for the week after the Fed dented the yellow metal's safe haven appeal.
"What is pretty obvious is that the inflation genie is starting to sneak out of the bottle, and that will be a major driver of interest rates in the short-to-medium term," said James McGlew, executive director of corporate stockbroking at Argonaut in Perth.
In Europe, analysts were already asking if the Bank of England, whose monetary policy committee meets next week, will follow in the Fed's footsteps and adopt a more bullish tone on the economy and what that would mean for the path of UK stimulus and interest rates.
In Asia, MSCI's broadest index of Asia-Pacific shares outside Japan was flat after falling for four sessions. Chinese blue-chip A shares were also little changed, along with Japan's Nikkei.
Gold prices, which plunged following the Fed comments, edged higher but were still set for their worst week since March 2020. Spot gold was last up 1.1 per cent at $US1792 per ounce.
Higher expectations of inflation continued to lift long-dated US Treasury yields. Benchmark 10-year notes yielded 1.4768 per cent, off 0.034 from a close of 1.511 per cent on Thursday.
The US dollar pulled back against the yen to 110.13, and the euro was flat at $US1.1909
Oil prices took a hit from the strong dollar as concerns over demand and new Iranian supply also weighed.
Global benchmark Brent crude was down 0.7 per cent at $US72.53 a barrel after settling at its highest price since April 2019 on Wednesday. US West Texas Intermediate crude, which touched its highest level since October 2018 on Wednesday, shed 0.66 per cent to $US70.57.
Australian Associated Press
