Stocks fluctuate as recession fears linger

Panic has swept through trading floors since data on Friday showed US consumer prices rising at their fastest pace in decades. ©AFP

London (AFP) - Stock markets diverged on Tuesday as investors fret over the possibility that the US Federal Reserve will move aggressively to combat inflation.

Panic has swept through trading floors since data on Friday showed US consumer prices rising at their fastest pace in decades on surging energy and food costs caused by the Ukraine war and supply chain snarls.

Investors are bracing for the Fed's interest rate decision on Wednesday as it struggles to walk a fine line between reining in inflation and trying to keep the economy on track.

"While there is no doubt that inflation is a considerable challenge for the US at this point, slamming on the brakes too hard risks pushing the economy off its track," said Tai Hui, chief market strategy for Asia at JP Morgan Asset Management.

The inflation reading has raised expectations that the US central bank could raise rates by a hefty 75 basis points, higher than its previous 50-point hike.

"The mood has turned very negative since the latter half of last week," said Craig Erlam, analyst at online trading platform OANDA.

"Now all the talk is about if we're heading for a recession and how bad it will be," Erlam said.

Those recession fears sent Wall Street plunging on Monday, with the broad-based S&P 500 stocks index sinking into a bear market after dropping more than 20 percent from its recent peak.

But Wall Street opened higher on Tuesday, with the S&P 500 up 0.2 percent in early trades while the tech-heavy Nasdaq was flat.

In Europe, Paris and Frankfurt were down in afternoon trades while London steadied.Asian equities mostly fell.

Oil prices, which have fuelled the global inflation surge, rose more than two percent, with Brent North Sea Crude, the international benchmark, topping $125 per barrel.

Elsewhere, data on Tuesday confirmed annual inflation in Germany, Europe's biggest economy, hit a record 7.9 percent in May.

It comes as confidence among German investors remains subdued despite picking up for the second month in a row.

The ZEW institute's economic expectations index climbed in June by 6.3 points to minus 28 points compared with May, but it is still well below pre-pandemic levels.

"The economy is still exposed to numerous risks, such as the effects of the sanctions against Russia, the unclear pandemic situation in China and the gradual change of course in monetary policy," said ZEW president Achim Wambach.