European stocks set for big drop, though still at one-month high

London — European stocks were little changed on Thursday, holding near recent one-month highs but set for the biggest quarterly drop since the start of 2020, while oil prices fell and eastern Ukraine braced for fresh attacks.

Asian shares fell and oil prices plunged after news that the US was considering releasing up to 180-million barrels from its strategic petroleum reserve as part of a move to lower fuel prices.

Brent crude futures were down 3.7% at $109.28, while US West Texas Intermediate futures were down 4.7% at $102.76.

Oil prices have surged since Russia invaded Ukraine in late February and the US and allies responded with hefty sanctions on Russia, the second-largest exporter of crude.

European stocks were mixed, but held near the highs they reached earlier in the week when investor sentiment became more positive about peace talks in Ukraine.

That optimism was petering out as Ukraine prepared for new Russian attacks, ahead of peace talks resuming on Friday.

Asian shares fell after Chinese purchasing managers index (PMI) data showed manufacturing and services activity contracted in March.

At 08.25am GMT, the MSCI World Equity index was down 0.2% on the day, while Europe’s Stoxx 600 was down 0.1%, just below the one-month high it hit on Tuesday.

The Stoxx 600 was on track for a 5.8% drop in the first quarter of 2022, its biggest quarterly fall since it plunged 23% in the first quarter of 2020.

Peter McCallum, rates strategist at Mizuho, said that investors were still cautious about Ukraine, with central banks facing a “stagflation environment”.

“It tends to be difficult for risk assets to perform with that backdrop, but I think there’s some sort of sense of relief at the moment among investors … it’s more tail risks being priced out than any good news being priced in,” he said.

A recent sell-off in US Treasuries paused and the 10-year Treasury yield edged lower, at 2.3416%, compared to its three-year high of 2.557% reached on Monday.

A key part of the yield curve steepened on Wednesday, unwinding recent moves betting that aggressive US Federal Reserve policy tightening could send the world’s largest economy into recession as it tries to curb soaring inflation.

European government bond yields were mostly down by about three to four basis points, as falling oil prices helped counter the recent sell-off in bonds. The German 10-year yield was set for its biggest monthly rise since 1996.