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European stocks close lower as chatter on interest rate hike gets louder

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Andrew Bailey,  Bank of England governor
Andrew Bailey, Bank of England governor, warned the Bank will 'have to act' to get a lid on rising inflation. Photo: PA

European markets headed lower on Monday in London as speculation surrounding a potential UK interest rate hike reached fever pitch. 

The moves lower come following a speech by Bank of England (BoE) governor Andrew Bailey, who warned the Bank will "have to act" to get a lid on rising inflation. 

Bailey predicted rising energy prices would push up inflation higher, and make it last longer. 

“Monetary policy cannot solve supply-side problems — but it will have to act and must do so if we see a risk, particularly to medium-term inflation and to medium-term inflation expectations,” said Bailey. 

The FTSE 100 (^FTSE) was 0.4% lower by the close. Germany's DAX (^GDAXI) was down 0.7% and France's CAC (^FCHI) headed 0.8% lower.

"The market is now expecting an interest rate hike by Christmas, largely thanks to the inflationary pressures which will inevitably follow the energy crisis, and some markedly hawkish rhetoric from the governor of the Bank of England," said Laith Khalaf, head of investment analysis at AJ Bell. 

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"According to interest rate markets, there is now an 85% chance of a rate rise this year, and a 60% chance of a hike at the next MPC meeting in November. Markets are pricing in tighter policy because the energy crunch could prompt a dramatic U-turn on interest rate policy at the Bank of England."

The moves lower also compounded jitters following GDP data in China that missed expectations. 

The data showed that China's economy grew 4.9% in the July to September quarter from a year earlier, the slowest pace in a year and worse than analysts had predicted.

This was far slower than the previous quarter when growth was almost 8%, suggesting that recovery is weakening.

Economic trends in China tend to precede similar moves in the west.

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Markets are also braced for another busy round of company earnings. Among others, Barclays bank (BCS) and Unilever (UL) report this week. 

On Friday, stocks staged their best session in five months fuelled by strong US corporate earnings. 

US stocks were in positive territory by the closing bell in London, following a lower open. The S&P 500 (^GSPC) was up 0.2%. The Dow (^DJI) almost flat and the Nasdaq (^IXIC) headed 0.3% higher.  

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Overnight in Asia markets were also buoyant, with the Hang Seng (^HSI) finishing 1% higher, Japan's Nikkei (^N225) up 1.7% and the SSE Composite (000001.SS) rising 0.1%. 

Eyes are on key data coming out of China, including fixed asset investment for September, retail sales, industrial production and jobs. 

"There is downside risk thanks to holidays, weather, the energy crunch, the government crackdowns along with rising material costs and supply chain disruption," said Jeffrey Halley, senior markets analyst for Asia Pacific at Oanda. 

"The National Bureau of Statistics press conference after will be worth following for signals on the path forward for China’s economy for the rest for the year and into 2022."

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