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European shares fell on Wednesday as investors assessed whether higher energy prices could keep inflation high for longer and prompt policymakers to raise interest rates this month.
Europe’s region-wide Stoxx 600 fell 0.4 percent at the opening bell, extending losses from the previous session. France’s CAC 40 and Germany’s DAX fell by similar amounts.
Futures contracts tracking Wall Street’s benchmark S&P 500 and the tech-focused Nasdaq Composite slipped 0.1 percent ahead of the New York open.
The move came as investors prepared for the release of highly anticipated U.S. inflation data showing that consumer prices rose at an annual rate of 3.6 percent in August, up from 3.2 percent in the previous month.
The headline figure is expected to rise as energy costs have risen since June after oil exporters Saudi Arabia and Russia announced a series of supply cuts to prop up prices.
International benchmark Brent crude was trading 0.3 percent higher at $92.3 a barrel on Wednesday after hitting a 10-month high in the previous session. U.S. counterpart West Texas Intermediate rose 0.4 percent to $89.15.
Despite the rally, analysts remain skeptical whether Wednesday’s inflation data will be high enough to pressure the U.S. Federal Reserve to raise interest rates when policymakers meet next week.
“The numbers will be too hot for the market to think the Fed will change its policy,” said Mike Zygmont, head of research and trading at Harvest Volatility Management.
Core US inflation, which excludes volatile energy and food prices, is expected to ease to 4.3 per cent year-on-year in August, from 4.7 per cent in the previous month.
However, additional pressure on prices prompted traders to hedge their bets in favor of another rate hike by the European Central Bank, which is due to announce its policy decision on Thursday.
Swap markets now give a 67 percent chance the central bank will raise eurozone interest rates by 0.25 percentage points to 4 percent this week.
“If the ECB decides to hike tomorrow, they may signal a willingness to hold off after that, which would keep the impact on terminal rates fairly limited,” said Jason Davis, global rates portfolio manager at JPMorgan Asset Management.
The yield on the policy-sensitive two-year German Bund rose 0.04 percentage points to 3.16 percent, while the yield on the 10-year Bund, a regional benchmark in Europe, rose 0.02 percentage points to 2.66 percent. Bond yields rise when prices fall.
Asian markets fell on Wednesday, with China’s benchmark CSI 300 and Hong Kong’s Hang Seng falling 0.2 percent each, while Japan’s Topix lost 0.1 percent.