LONDON (Reuters) - Stocks fell on Friday as traders wrestled with this week's surprisingly hawkish turn from major central banks in the fight against inflation, and as rising Omicron cases spark worries about the hit to the global economy.
European stocks dropped, Asian shares closed near the year's lows and Wall Street looked set to open weaker after a bruising session the day before that was led by sharp falls in tech stocks.
The pan-European EUROSTOXX was down 0.65% by 1130 GMT. Germany's DAX dropped 0.81%, although Britain's FTSE 100 bucked the trend with a 0.26% rise.
Wall Street futures were in the red, with Nasdaq futures down 0.66%.
U.S. stocks have now reversed all of their gains from Wednesday when markets welcomed the Federal Reserve's commitment to tackle rising inflation with faster bond tapering and interest rate rises next year.
MSCI's broadest index of Asia-Pacific shares outside Japan shed 0.76% on Friday, only just holding above the year low set last week, while Chinese blue chips lost 1.59% and suffered their worst week in three months.
Stocks are going into the year-end period - when many traders are reluctant to put on new positions - near record highs but with plenty to worry about.
The hawkish tilt from central banks this week including the Federal Reserve and Bank of England, and to a lesser degree the European Central Bank, was initially greeted by a wave of buying from investors confident policymakers will curb higher inflation.
But the mood has since turned gloomier as traders fret markets pumped up on cheap money are vulnerable to even the smallest of pullbacks in stimulus.
"Volatility is rising again, lowering the predictability of what may happen next," said Ipek Ozkardeskaya, Senior Analyst at Swissquote.
After enjoying its best week since February last week, the MSCI World Index is down 1% from Monday's open.
(Graphic on,MSCI World Index: https://fingfx.thomsonreuters.com/gfx/mkt/egpbkogeavq/world%20stocks.PNG)
Even the Bank of Japan on Friday dialled back some emergency pandemic-funding but maintained its ultra-loose policy and extended financial relief for small firms, cementing expectations it will remain among the most dovish central banks for the foreseeable future.
Euro zone inflation surged to its highest on record in November at 4.9% year-on-year, official data confirmed on Friday, while several conservative ECB policymakers said the central bank may be underestimating inflation risks. [
OMICRON JITTERS
Adding to the caution are worries that rising Omicron infection rates mean a rocky few months for the global economy, although most economists think the damage will be much less severe than in previous waves of COVID-19 cases.
Investors held on to safe-haven government debt. The yield on benchmark 10-year U.S. Treasury notes fell to as low as at 1.409%, while the two-year yield was steady at 0.63%, having rolled off its recent highs. German yields also dropped. [US/]
"Ordinarily, in the wake of a more hawkish (Federal Open Market Committee) outcome, yields would be expected to rise in anticipation of the Fed tightening cycle," said analysts at Westpac.
"However, there are competing dynamics at present, with ongoing inflation fears sparking the Fed's tougher rhetoric being offset by fears that economic growth will be derailed by Omicron in the near term," they added.
The Fed was not the only central bank to turn hawkish with the Bank of England surprising markets on Thursday by becoming the first G7 central bank to raise interest rates since the pandemic.[FRX/]
Sterling slipped 0.2% but at $1.329 held to some of Thursday's jump following the BoE hike.
The dollar index was trading at 96, unchanged on the day and off nearly 1% since Wednesday's high immediately after the Fed's announcement.
Japan's yen was up slightly to 113.48 yen per dollar.
Oil prices fell with Brent crude down 1.65% to $73.78 a barrel and U.S. crude losing 1.73% to $71.16 a barrel.[O/R]
Spot gold rallied, moving past the symbolic $1,800 level to trade 0.6% higher at $1,809 an ounce, its highest since Nov. 26. [GOL/]
(Additional reporting by Alun John in Hong Kong; editing by David Evans, Kirsten Donovan)
By Tommy Wilkes
© Reuters 2021
