Euro, Bond Yields Lifted by Strong Inflation Data -- 3rd Update

By Mike Bird and Ese Erheriene Features Dow Jones Newswires

The euro and government bond yields in Europe jumped Friday on surprisingly strong inflation figures, while stocks fell.

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Stocks began the week strongly following the market-friendly result Sunday from the first round of elections in France, but stocks have given back some ground since.

The Stoxx Europe 600 index was down 0.2% in late-morning trading in Europe. U.S. equity futures were mixed, with the S&P 500 up 0.04% ahead of the opening bell and Dow Jones Industrial Average futures down 0.01%.

Official figures released midmorning showed the eurozone's core inflation rate--which excludes volatile food and energy prices--at 1.2%, the highest level since 2013. Analysts were expecting a rise of 1%. Headline inflation reached 1.9%, touching the European Central Bank's target of slightly below 2%.

The euro rose 0.7% on the news to as high as $1.094. Yields on 10-year German government bonds rose to 0.354% after the release.

The euro had dropped Thursday on European Central Bank President Mario Draghi's insistence that the era of easy monetary policy isn't over in Europe.

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"There is clearly a risk that we could stand at the June meeting with an ECB that changes its forward guidance in a more hawkish direction provided the cyclical situation looks good," said Pernille Bomholdt Henneberg, chief analyst at Danske Bank.

Despite the cooling in equity markets toward the end of the week, European equity funds recorded their strongest inflows in more than a year, according to EPFR Global data.

In the week to April 26, $2.4 billion entered European equity funds, which included the jump in equity prices--particularly in the banking sector--that came after the first round of the French presidential election. Those net flows are the strongest into European equities since December 2015.

"Europe is overweight financials, commodities and industrials relative to the U.S.," said David Stubbs, global market strategist at J.P. Morgan Asset Management.

"With stronger growth at home, a cyclical upswing globally, the euro competitive and trade recovering you should see an uptick--this should be the year that earnings growth arrives," he added.

Bank of America Merrill Lynch analysts see continued gains for European equities in the next year, expecting the Stoxx Europe 600 index to rise to 420 from 387 currently, a gain of around 8.5%, on improved earnings.

Elsewhere in foreign exchange markets dollar was down across the board in midmorning European trading, falling 0.2%, according to the WSJ dollar index, which measures the greenback against a basket of international currencies.

The British pound also rose against the dollar, up 0.3% to $1.294, touching its highest levels since early October, despite British economic data showing a growth slowdown in the first quarter of the year.

In Asia, Japan's Nikkei 225 index closed down 0.3%. Hong Kong's Hang Seng Index fell 0.3%. China's Shenzhen A-share index bucked the trend, rising 0.4%.

South Korea's Kospi closed 0.2% lower after President Donald Trump said he wanted to renegotiate a trade deal with the country, in an interview with Reuters.

Mr. Trump also said a major conflict over North Korea's nuclear ambition is possible.

"The fact there's potential for a showdown with North Korea, that's always going to worry investors in Japan," said Andrew Sullivan, managing director of sales trading at Haitong International Securities. "You [might] get the North Koreans put into a corner and they feel they just have to do something...One risks pushing them too far."

In the tech sphere, shares of Japan's Nintendo gained 2.1% after it reported better-than-expected fiscal-year results. The company recorded a net profit of Yen102.6 billion ($920 million) for the year ended in March, beating street forecasts of Yen93.6 billion.

In the U.S., the S&P 500 and the Dow Jones Industrial Average rose less than 0.1% Thursday while the Nasdaq Composite gained 0.4%, hitting a fresh closing high.

Kosaku Narioka and Hiroyuki Kachi and

Yifan Xie

contributed to this article.

Write to Mike Bird at Mike.Bird@wsj.com and Ese Erheriene at ese.erheriene@wsj.com

(END) Dow Jones Newswires

April 28, 2017 07:20 ET (11:20 GMT)