Stocks Recover as Investors Watch Inflation -- Update

By Riva Gold and Lucy Craymer Features Dow Jones Newswires

Stocks and bonds showed signs of recovering on the final day of the second quarter as investors focused on fresh signals on global inflation.

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The Stoxx Europe 600 rose 0.5% midday as a rebound in the technology sector helped offset a drop in chemicals companies. Futures pointed to 0.2% opening gain for the S&P 500, brushing off widespread declines across Asian markets, while bond yields steadied late morning after a recent jump.

While stocks around the world have spent most of the year climbing and government bond yields have remained ultralow, those trends had reversed for most of this week amid pressure on the tech sector and worries that global central banks may be tightening policy faster than previously expected in response to a strengthening economy.

Comments earlier this week from European Central Bank President Mario Draghi had sent government bond yields and the euro sharply higher amid expectations that a pickup in the region's economy might prompt it to tighten policy.

"We think Europe is finally on track," said Andy Flynn, fund manager at William Blair. Eurozone businesses and consumers were more optimistic in June than at any time since before the global financial crisis, data showed this week.

On Friday, government bonds recovered some of their losses and the euro stalled as data showed the eurozone's annual rate of inflation fell for the second straight month in June to its lowest level in 2017. The euro fell 0.4% to $1.1401, but was still on track to end the week 1.8% higher.

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Yields on 10-year German government bonds edged down to around 0.441% from 0.451% on Thursday, while Treasury yields steadied at 2.271% from 2.270%. Yields move inversely to prices.

"You probably will continue to see core inflation staying below the targeted 2%, which means central banks will probably adjust policy in a very, very slow manner," said Fabrice Théveneau, head of equities at Lyxor Asset Management.

In the U.S., the Federal Reserve's preferred inflation gauge, the price index for personal-consumption expenditures, is due later Friday.

A moderate amount of inflation should be good for equity markets, Mr. Théveneau said, as there is just enough for companies to have pricing power and avoid the risk of deflation, but not enough to force a rapid pickup in interest rates.

Earlier, the global bond selloff had spread to Asia, pushing the yield on Japan's 10-year government bond to its highest in more than three months.

Asian equities declined, echoing losses in the U.S. and Europe on Thursday. Major U.S. stock indexes had slumped amid fresh losses in the technology sector.

In Japan, the Nikkei fell below 20000 for the first time in two weeks before recovering to end down 0.9%. South Korea's Kospi edged down 0.2%, hit by a drop in index behemoth Samsung, while Australia's S&P/ASX 200 slid 1.7% as major bank shares fell.

Friday's stock weakness there might be the result of companies' "squaring up their books," on the last working day of the financial year for a large number of Australian companies, said Grant Williamson, a director at Hamilton Hindin Greene in New Zealand.

The Hang Seng fell 0.8% amid a decline in shares of Tencent, while the Shanghai Composite Index edged up 0.1% as releases of better-than-expected PMI data on both the manufacturing and service sectors helped keep Chinese markets steady.

In currencies, the WSJ Dollar Index edged up 0.1% from its lowest close since November as investors waited for the U.S. inflation data. The British pound fell 0.2% to $1.2979 as data showed British households suffered the longest sustained decline in disposable income in over four decades.

Paul Hannon contributed to this article.

Write to Riva Gold at riva.gold@wsj.com and Lucy Craymer at Lucy.Craymer@wsj.com

(END) Dow Jones Newswires

June 30, 2017 08:04 ET (12:04 GMT)