London - Fears of more interest rate increases in China weighed on global markets Wednesday, while the euro headed up towards 18-month highs against the dollar despite confirmation of a $115bn bailout for Portugal.
Following another interest rate increase by India's central bank, the People's Bank of China voiced its continued concerns over inflation, stoking speculation that it may raise interest rates again in the months to come.
"Fears about further Chinese monetary policy tightening are being linked with the poorer tone after the People's Bank of China said stabilizing prices is critical," said Jane Foley, an analyst at Rabobank International.
As a result, Chinese shares were the big losers Wednesday with mainland Chinese shares posting their biggest loss in over two months. The Shanghai Composite Index fell 2.3% to 2 866.02, while the Shenzhen Composite Index lost 2.2% to 1 187.28. Shares in oil, coal and real estate industries weakened.
That selling pressure continued through into the European session. Britain's FTSE 100 fell 0.8% to 6 036, while Germany's DAX dropped 0.2% to 7 483. The CAC-40 in France was 0.1% lower at 4 093.
Wall Street was headed for a fairly flat opening - Dow futures were up 0.1% at 12 764, while the broader Standard & Poor's 500 futures rose by a similar rate to 1 353. On Tuesday, US stocks were subdued after disappointing earnings from the likes of Pfizer, the world's largest drug maker, Molson Coors Brewing Co., and Beazer Homes.
The main point of attention in the US later will be the monthly jobs report from the ADP payrolls firm, which could provide investors an insight into Friday's main government report for April, which often sets the tone in markets for a week or two.
In Europe, the focus this week will be on interest rate decisions from the European Central Bank and the Bank of England. Neither is expected to change interest rates, though the ECB is expected to indicate Thursday that it will follow April's first interest rate increase in nearly three years with another rise in June.
That belief has bolstered the euro currency over the past couple of months despite ongoing debt problems, most notably in Greece, Ireland and Portugal. While the ECB is poised to raise interest rates again in the coming months, the US Federal Reserve has shown few signs it's ready to lift its super-low interest rates. That's added to the dollar's recent weakness against the euro.
By late morning London time, the euro was 0.2% higher at $1.4855, not far off its 18-month high just above $1.49.
The euro gained despite figures showing a 1% decline in retail sales in the 17 countries that use the euro in March, and confirmation that Portugal has agreed to a €78bn ($115bn) bailout from its partners in the European Union and the International Monetary Fund.
"For the foreign exchange markets, the details of Portugal's bailout terms are of little relevance with the focus still firmly on diverging policy between the US and elsewhere," said Derek Halpenny, European head of global currency research at The Bank of Tokyo-Mitsubishi UFJ.
While the European Central Bank is poised to raise interest rates again in the months to come, the US Federal Reserve doesn't look like it's going to change its super-low borrowing costs any time soon.
Elsewhere in Asia, Hong Kong's Hang Seng index dropped 1.4% to 23 315.24, while South Korea's Kospi fell 0.9% to 2 180.64. Markets in Japan were closed for a holiday.
In the oil markets, benchmark crude for June delivery was down 7 cents at $110.98 a barrel in electronic trading on the New York Mercantile Exchange. The contract fell $2.47 to settle at $111.05 on Tuesday.