Stocks fell and bonds retreated after China took further steps to curb lending and a European Central Bank executive board member said the bank may need to raise interest rates. Bahrain’s debt risk increased for a fifth day as unrest in the Middle East spread. The Stoxx Europe 600 Index lost 0.3 percent at 8:15 a.m. in New York. Standard & Poor’s 500 Index futures fluctuated between gains and losses. The yield on the two-year U.S. Treasury note rose three basis points and Germany’s 10-year bund added four basis points. The euro erased declines against the dollar. The cost of insuring Bahrain’s debt climbed to the highest level since July 2009. China’s central bank raised reserve requirements for lenders for the second time this year to counter inflation and curb property-price gains. The ECB’s Bini Smaghi said monetary policy “has to be monitored, and if needed, corrected” as inflationary pressures rise. Protesters in Bahrain gathered for the funeral of two men killed by security forces and Egypt’s Foreign Ministry confirmed it has received a request from Iran for two military ships to pass through the Suez Canal. “This is just the start from China and they will continue tightening lending and raising interest rates, doing their utmost to contain this,” said Philippe Gijsels, the Brussels- based head of research at BNP Paribas Fortis Global Markets. “If the Chinese start to take out the liquidity that’s been so important, it’s got the potential to be a disturbance for the world’s stock markets.” Reserve ratios will increase half a percentage point starting Feb. 24, the People’s Bank of China said on its website today. China raised interest rates 10 days ago. G-20 Group of 20 policy makers meeting today in Paris will confront inflation as they seek ways to sustain the global recovery. The cost of living in the U.S. rose more than forecast in January, with the so-called core rate, which excludes food and fuel costs, having the biggest gain since October 2009, a report showed yesterday. German producer prices increased at the fastest pace in more than two years last month as energy costs increased, the Federal Statistics Office said today. The difference between yields on two-year notes and Treasury Inflation Protected Securities, which tracks the outlook for consumer prices over the life of the debt, increased to 1.97 percentage points, the widest since July 2008. The euro rebounded, gaining 0.1 percent against the dollar and 0.3 percent versus the yen. ‘Pre-Emptive Actions’ Commodity-price increases will “have an unavoidable impact” and “it is a key challenge for monetary policy to avoid spillovers and maintain inflation expectations in check,” the ECB’s Smaghi said in an interview with daily newsletter Bloomberg Brief: Economics. “This requires the ability to take pre-emptive actions if needed.” The pound climbed as a report showed retail sales rose almost four times as much as economists forecast in January. Sales gained 1.9 percent from the previous month, when they fell a revised 1.4 percent as snow and freezing temperatures kept Britons from shopping, the Office for National Statistics said today in London. The gain was the biggest since February 2010 and exceeded the 0.5 percent median forecast of 22 economists in a Bloomberg News survey. Sterling strengthened 0.3 percent against the dollar. The yield on the two-year gilt climbed six basis points to 1.51 percent. Short-sterling futures fell, sending the implied yield on the contract expiring in December up six basis points to 1.72 percent as traders added to bets that U.K. interest rates will rise. Portuguese Yields The yield on Portugal’s 10-year bond rose 11 basis points, sending the extra yield investors demand to hold Portuguese debt instead of benchmark German bunds 12 basis points higher to 438 basis points. German elections beginning on Feb. 20 will test voter appetite for supporting weaker members of the currency region. Three companies fell for every two that rose in Europe’s Stoxx 600. TomTom NV sank 8.8 percent after the region’s biggest maker of portable navigation devices forecast “broadly flat” sales and earnings this year. Rentokil Initial Plc tumbled 6.1 percent after posting a loss. Schibsted ASA, Norway’s biggest media company, slid 5.5 percent after its earnings missed analyst estimates. U.S. futures were little changed after the S&P 500 yesterday rose to the highest level since June 2008. U.S. markets will close for a three-day weekend tonight for the President’s Day holiday. Bahrain Debt Credit-default swaps on Bahrain climbed six basis points to 292, according to CMA in London. Yields on the country’s dollar bonds due 2020 increased for a ninth day, rising four basis points to a record 6.56 percent, according to data compiled by Bloomberg. The MSCI Emerging Markets Index climbed 0.8 percent to the highest level on a closing basis since Feb. 8. Asian equities led the advance after a report showed Taiwan’s economy expanded more than analysts estimated. The Taiex Index of shares traded in Taipei climbed 1.8 percent, the most since Sept. 13. To contact the reporter on this story: Stephen Kirkland in London at skirkland@bloomberg.net. To contact the editor responsible for this story: Paul Sillitoe at psillitoe@bloomberg.net.

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