Stock markets lower on eve of US inflation data

Investors fear a higher-than-forecast inflation reading could spark another market sell-off. ©AFP

London (AFP) - Stock markets were mostly lower and the dollar fell on Tuesday as investors nervously await the release of key US inflation data later this week, traders said.

If the data, scheduled for publication on Wednesday, come in above analysts' forecasts, the markets could see a sharp sell-off, analysts warned.

With inflation already at the highest level in 40 years, concern is growing that further monetary tightening by the world's major central banks could go too far and tip the global economy into recession.

The inflation data "could effectively set the mood for the rest of the summer," said OANDA analyst, Craig Erlam.

"That seems quite dramatic, but if we fail to see a drop in the headline rate...it could really take the wind out of the sails of stock markets as it would be very difficult for the (US Federal Reserve) to then hike by anything less than 75 basis points in September," the expert said.

The US central bank has already raised borrowing costs by three-quarters of a percentage point twice in recent months in a bid to tame runaway prices.

Swissquote Bank analyst Ipek Ozkardeskaya said the recent drop in energy and commodity prices "should have a cooling effect...but higher labour costs could keep inflation sticky at undesirably high levels".

Oil prices rose, but remain around six-month lows as recession fears mount and investors fret over the impact on demand.

The markets are also keeping an eye on Iran nuclear talks after the European Union submitted a "final text" at negotiations to salvage a 2015 deal.

An agreement could open the way for Tehran to resume sales of crude on international markets, partly filling the gap left by the ban on Russian exports following the invasion of Ukraine.

Edward Moya, analyst at OANDA trading group, said "it seems unlikely a breakthrough will happen anytime soon.

"Tehran seems like they are willing to negotiate, but an imminent decision to agree to the EU's proposal seems unlikely," he said.