Stocks dip as traders mull US rates outlook

US and European stocks mostly retreated Tuesday as dealers fretted that the Federal Reserve would push interest rates higher than expected and for longer as it battles stubbornly high inflation.

The euro recovered against the dollar as strong inflation data in France and Spain sparked concerns that the European Central Bank will also need to push interest rates even higher.

"European markets have finished a positive month on the back foot after the latest flash (inflation) numbers for February from France and Spain surprised to the upside," said market analyst Michael Hewson at CMC Markets.

This has prompted traders to price a peak ECB rate of four percent for the first time, he added.

Wall Street stocks finished lower on Tuesday as well as consumer confidence data disappointed.

But in a favorable development for stocks, the yield on the 10-year US Treasury note retreated.

Stocks have been buffeted in recent sessions by fears the Federal Reserve will extend its aggressive interest rate hikes.

"Today, there really was no conviction in one direction or another," said Steve Sosnick, chief strategist at Interactive Brokers.

Frankfurt stocks eased down 0.1 percent and Paris dipped 0.4 percent.

Data provider Kantar said British food inflation hit a record 17.1 percent in the four weeks to February 19.

London stocks shed 0.7 percent, weighed down Tuesday also by poor results from online supermarket Ocado.

- Not yet finished -

Meanwhile, the pound extended gains won on Brexit deal alterations aimed at smoothing some trading obstacles between the UK and the European Union.

Prime Minister Rishi Sunak and European Commission president Ursula von der Leyen agreed Monday on a sweeping overhaul of trade rules in Northern Ireland, which borders EU member Ireland.

Eurozone bond yields surged, with the yield on the benchmark German 10-year government bond rising to a 12-year high and the French 10-year government bond rising to an 11-year high.

But in the United States, recent figures showing a robust jobs market and inflation not coming down as quickly as hoped spooked traders this month as they bet on more US interest rate hikes, wiping out most of January's equities rally.

Principal Asset Management analyst Seema Shah cautioned that it was "increasingly clear" that the Federal Reserve "is not yet finished with rate hikes."

"Relentless monetary tightening will eventually weigh on both the economy and earnings -- a headwind that will, inevitably, renew and extend the equity market drawdown," she cautioned. analyst Patrick O'Hare added: "We would expect interest rate moves to continue to dictate the action as we move into March, followed closely by earnings estimate trends."

"Lately, that has been a toxic combination: interest rates moving up and earnings estimates coming down," he said.

Shares in troubled Italian bank Banca Monte dei Paschi di Siena fell 8.1 percent after French insurance giant AXA dumped its eight percent holding.

But oil prices have rebounded.

"Crude oil prices continue to ebb and flow between hopes of a pickup in Chinese demand and concerns that central banks are likely to have to overtighten in order to tamp down increasing inflationary pressures," said Hewson.

- Key figures around 2205 GMT -

New York - Dow: DOWN 0.7 percent at 32,656.70 points (close)

New York - S&P 500: DOWN 0.3 percent at 3,970.15 (close)

New York - Nasdaq: DOWN 0.1 percent at 11,455.54 (close)

London - FTSE 100: DOWN 0.7 percent at 7,876.28 (close)

Frankfurt - DAX: DOWN 0.1 percent at 15,365.14 (close)

Paris - CAC 40: DOWN 0.4 percent at 7,267.93 (close)

EURO STOXX 50: DOWN 0.2 percent at 4238.38 (close)

Tokyo - Nikkei 225: UP 0.1 percent at 27,445.56 (close)

Hong Kong - Hang Seng Index: DOWN 0.8 percent at 19,785.94 (close)

Shanghai - Composite: UP 0.7 percent at 3,279.61 (close)

Pound/dollar: DOWN at $1.2013 from $1.2064 on Monday

Euro/pound: DOWN at 88.01 pence from 87.94 pence

Euro/dollar: DOWN at $1.0583 from $1.0609

Dollar/yen: DOWN at 136.13 yen from 136.19 yen

Brent North Sea crude: UP 1.7 percent at $83.89 per barrel

West Texas Intermediate: UP 1.8 percent at $77.05 per barrel