Market forecasts show that there is an air of doom and gloom with regard to global growth and reports suggest that inflation kept most equity markets on the defensive yesterday, while oil prices shrugged aside a boost in production from Saudi Arabia and the dollar rallied.

At the same time, data from Europe revealed a contraction in both the manufacturing and service sectors this month, which ignited a rally in government bond prices and led to a weaker euro. However, output prices were near their record peak of January 2007, while input prices were at their highest level since October 2000.

Experts now say that this may prove to be difficult conditions for emerging economies arguably because inflation may need to be combated with rising rates despite the existing growth in account deficits.

Tobias Levkovich, chief US equity strategist at Citigroup, said: “A domestic industrial economic slowdown seems inevitable given the normal lag between a more challenging credit environment and business investment, with Europe also slowing sharply of late.”

The Financial Times says that Hungary's Monetary Policy Council surprised investors when it elected to keep policy rates steady at 8.5%. Over the past three months, policy has been tightened by 100 basis points, and the forint hit a five-year high against the euro last week. Analysts expect the bank to tighten rates in coming months.

The Reserve Bank of India yesterday signalled rate hikes were likely, but played down aggressive tightening after wholesale price inflation recorded its highest level in 13 years on Friday. The inflation data and RBI comments sparked volatile trading in the debt market. After spiking to 8.76%, the yield on India's benchmark 10-year bond closed unchanged at 8.63%.

Analysts at Emerging Portfolio Fund Research said: “Appetite for global bond funds continues to fall off a cliff, with year-to-date outflows from these funds now north of $15bn.” In an earlier statement made last week, the company said that emerging markets bond funds suffered from the broad jitters about rocketing inflation in key markets such as Russia, Turkey, China and Argentina.

In general, FT says that government bond markets were firmer in Europe and lower in the US. The yield on the US two-year Treasury rose 9bp to 2.94%, while the yield on the 10-year note was up 4bp to 4.17%. In the UK, and eurozone, bonds rallied, led by steeper falls in two-year yields than those of the 10-year sector.

In currency trading, the dollar rallied against its rivals as weak data sapped the euro, and yen, while a fall in UK housing prices hurt sterling. The yen dropped 0.6% to Y107.81, after a survey from the Japanese Cabinet Office showed business conditions had deteriorated across the board in the second quarter. Additionally, European and US equity markets and corporate credit valuations were range bound. The FTSE Eurofirst 300 index was flat at 1,222.89; in London, the FTSE 100 rose 0.8 % to 5,667.2.

In New York, the S&P 500 closed a fraction firmer. Energy stocks rose, but financials extended recent declines. Stocks in Asia fell to three-month lows as investors reacted to Wall Street's drop on Friday. Japan's Nikkei 225 closed down 0.6% on weak survey data, while Hong Kong edged 0.1% lower. Taiwan declined 0.6%, South Korea lost 0.9% and Shanghai fell 2.5% extending its loss this year to 47.5%.

Oil and gold remained the focus of commodity trading. Gold fell more than 2% but steadied above $880 an ounce as the dollar rallied. Saudi Arabia's output increase was offset by production disruptions in Nigeria. US crude rose $1.38 at $136.74 yesterday in New York.