World stocks have retreated from record highs as the feelgood factor of slowing US inflation and somewhat comforting Fed signals made way for a fresh bout of politics- and tariffs-induced weakness in Europe.

Bond market borrowing costs and the dollar rose on Thursday after the Fed nudged back rate-cut expectations, but with the moves only partly reversing big falls the previous day, markets had their focus firmly on the dramatic action elsewhere.

That was mainly Europe where the continent-wide STOXX 600 was driven 1.0 per cent lower by a 2.2 per cent slump in its car makers as China signalled it would respond to the EU’s move to slap tariffs of up to 38.1 per cent on China-made electric vehicles from July.

A drop in bank stocks as well not only pointed to the market’s changed outlook on rates but also the uncertainty caused by this week’s sharp swing to the right in EU elections and France’s decision to call a snap parliamentary election.

The difference, or spread, between French and German bonds was a steady 61 basis points having hit its widest since March 2023 this week. 

Standalone yields on most sovereign bonds were between 1-3 basis points higher after Wednesday’s softer-than-expected US CPI figure that led to their biggest falls since mid-May.

The Fed shift “could have been big”, AXA’s Chief Economist Gilles Moec said.

“But I think it was drowned out by the US inflation data we had so the data beat the Fed guidance.”

On the EV tariffs, he said the EU was at least taking a more targetted company-by-company approach rather than the kind of blanket measures seen from the United States.

“And protectionism is something that got quite a bit of traction during the EU elections campaigns,” he said.

Japanese shares and the yen had underperformed overnight as the Bank of Japan began a two-day policy meeting that was expected to see it inch towards a modest tightening of its policy stance.

MSCI’s index of Asia-Pacific shares outside Japan climbed 0.6 per cent though as Taiwan’s tech-heavy stock market surged 1.8 per cent to a new high buoyed by the US S&P 500 and Nasdaq closing at all-time peaks on Wednesday.

Chinese stocks had also been dented by the European EV tariffs move, which came less than a month after the US revealed plans to quadruple its duties on Chinese EVs, which are now regarded as some of the best on the market, to 100 per cent.

Brussels said its tariffs would range from 17.4 per cent for BYD to 38.1 per cent for SAIC, on top of the standard 10 per cent car duty. 

That takes the highest overall rate to almost 50 per cent.

There was other geopolitical posturing too. 

The US had imposed a new ban on Russian stocks trading on Wednesday while on Thursday, G7 leaders back a long-awaited move to funnel $US50 billion ($A75 billion) of frozen Russian central bank reserves money to Ukraine.

Wall Street futures were still pointing to further gains there later though, with the S&P expected to open 0.2 per cent higher and the Nasdaq 0.6 per cent better off with May’s producer price index reading and weekly jobless claims data both due for release shortly.

“Ultimately, I think markets prefer strong and robust economic growth with no rate cuts than faltering growth with multiple rate cuts,” said David Chao, global markets strategist, Invesco Asia Pacific.

“We are in this environment where I don’t think it really matters for markets when the first (Fed) rate cut is going to happen – markets can still perform well.”

In his post-meeting press conference on Wednesday, Fed Chair Jerome Powell said the rate-path decision was a “close call” for many policymakers, and to some degree, a later start to rate reductions this year had been compensated for with an additional cut in 2025.

The closely watched CPI report earlier in the day had showed core US prices growing at their slowest annual pace in more than three years in May and analysts also took the view that those figures would not have been ready in time for the Fed’s forecasts.

“The Fed has changed its mind multiple times on its expected policy path, so we don’t put much weight on its new set of projections,” BlackRock Investment Institute head Jean Boivin said.

The US 10-year Treasury yield, which is the main driver of global borrowing costs, was at 4.31 per cent in Europe, bang in the middle of where it had traded the previous day. 

Japan’s 10-year yields fell as much as 3 bps to 0.955 per cent for the first time since mid May.

The Nikkei newspaper reported that the BOJ is likely to debate a reduction in monthly bond purchases at its policy gathering ending on Friday, echoing earlier reports from Reuters and other news outlets.

The yen was a notable underperformer against the dollar overnight. 

It lost 0.3 per cent to 157.17 per dollar, erasing Wednesday’s 0.3 per cent advance while the euro was steady at $US1.08 ($A1.62) after what had been its best day of the year, albeit after three days of politics-driven losses.

In the other closely watched markets, gold fell 0.5 per cent to $US2,310.30 ($A3,472.04) per ounce and oil dipped to $US82 ($A123) a barrel following a bigger-than-expected rise in US stockpiles. 

Brent crude though is on course for its best week since early April.

This post was originally published on Michael West.