Wall Street shares down as inflation worry offsets U.S.-China optimism

By Chris Prentice and Simon Jessop

WASHINGTON/LONDON (Reuters) -Wall Street main indexes finished lower on Friday after data showing persistent U.S. inflation offset expectations of an easing in U.S.-China tensions after a call between President Joe Biden and China's Xi Jinping.

U.S. producer prices increased solidly in August, indicating that high inflation is likely to persist for a while, with supply chains remaining tight as the COVID-19 pandemic drags on.

"Headlines reflecting the highest annual producer price increases in decades won’t give those worried about inflation much comfort, but the smaller month-over-month increase and recent evidence indicating supply chain bottlenecks are no longer intensifying suggest a peak in producer inflation may be near," said Marc Zabicki, director of research for LPL Financial.

The Dow Jones Industrial Average fell 64.65 points, or 0.19 percent, to 34,814.73; the S&P 500 lost 4.21 points, or 0.09 percent, to 4,489.07 and the Nasdaq Composite dropped 3.20 points, or 0.02 percent, to 15,245.06.

Earlier, global equities markets gained after news that the U.S. president and his Chinese counterpart spoke for 90 minutes on Thursday, their first talk in seven months, discussing the need to avoid conflict between the world's two largest economies.

China shares rose 0.08%, giving a fillip to the region and lifting MSCI's World index, its broadest gauge of global stock markets 0.07%, on course to end a three-day losing streak.

Despite the gains, helped by a similar performance across Europe's top markets, the index remains down 0.6% on the week and on course for its first drop in three, albeit hovering near a record high.

Apple Inc fell over 3% following a U.S. court ruling in "Fortnite" creator Epic Games' antitrust lawsuit that struck down some of the iPhone maker's restrictions on how developers can collect payments in apps.

The pace at which central banks, especially the U.S. Federal Reserve and European Central Bank, choose to trim their economic support remains the driving force of market sentiment amid rising inflation concerns.

Thursday's move by the ECB to trim bond purchases slightly is expected to be followed by the Fed later this year, according to some officials, despite a weak August U.S. jobs report.

"With the ECB raising its economic projections for 2022 and beyond, it appears that the high-water mark in policy accommodation has been passed," said Mark Dowding, chief investment officer at BlueBay Asset Management.

Looking ahead, Dowding said next week's U.S. inflation print could help dictate near-term market direction.

Despite the prospect of reduced stimulus packages, Mark Haefele, chief investment officer at UBS Global Wealth Management, said he expected central banks to keep interest rates low.

"This is positive for equity markets, particularly cyclical and value areas of the market. And while this complicates the search for yield, we continue to see opportunities," he wrote in a note to clients.

"In currencies, we think going long GBP and NOK and short EUR and CHF should provide a mid- to high-single-digit percentage upside on a total return basis over the next six to 12 months."

Against the broader risk-on backdrop, and despite persistent concerns around COVID infection rates, the greenback was up 0.1% against a basket of major peers.

The euro was last down 0.12 percent, at $1.1811, while Europe's broad FTSEurofirst 300 index dropped 0.23 percent at 1,796.26.

The yield on benchmark 10-year Treasury notes rose after the U.S. inflation data.

Elsewhere in currencies, the pound fell 0.01% despite data showing the British economic recovery slowed in July.

Oil rallied to $73 a barrel on signs of tight U.S. supplies after Hurricane Ida hit output. [O/R]

Brent crude rose to settle at $1.47, or 2.3%, to $72.92. The session high was $73.15 a barrel. U.S. West Texas Intermediate (WTI) crude rose $1.58, or 2.3%, to $69.72.

Gold held a tight range on uncertainty over the Fed's tapering timeline. U.S. gold futures settled 0.4% lower at $1,792.1 an ounce. [GOL/]

(Additional reporting by Alun John in Hong Kong; Editing by Raissa Kasolowsky, Steve Orlofsky, Dan Grebler and Jonathan Oatis)

FILE PHOTO: A street sign for Wall Street is seen outside the New York Stock Exchange (NYSE) in New York City, New York, U.S., July 19, 2021. REUTERS/Andrew Kelly/File Photo

FILE PHOTO: Signage is seen outside the entrance of the London Stock Exchange in London, Britain. Aug 23, 2018. REUTERS/Peter Nicholls

FILE PHOTO: A men wearing a mask walk at the Shanghai Stock Exchange building at the Pudong financial district in Shanghai, China, as the country is hit by an outbreak of a new coronavirus, February 3, 2020. REUTERS/Aly Song

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