Stagflation fears keep stock markets in a bad mood

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LONDON (Reuters) – Global stocks were down on Monday and the dollar remained close to its one-year highs amid fears that higher inflation, supply shortages and problems in China’s real estate sector could put the spotlight on global economic recovery in jeopardy.

FILE PHOTO: Pedestrians exit and enter the London Stock Exchange in London, Britain August 15, 2017. REUTERS / Neil Hall / File Photo

Stock markets slipped to 2.5-month lows last week, after a scorching September that saw them lose more than 4% as U.S. Treasury yields jumped 20 basis points, the Reserve Federal government signaled it was ready to start loosening stimulus this year and Chinese real estate giant Evergrande markets were heading for bankruptcy.

These factors remain in play as trading in Evergrande shares is suspended days after missing a second round of interest payments on offshore debt.

Wall Street was expected to open more weakly, with a focus on the fate of the Biden administration’s multibillion-dollar spending plans, congressional wrangling over Treasury debt ceiling and monthly jobs data Friday that could allow the Federal Reserve to reduce its bond purchases. .

Futures contracts for the S&P 500 and Nasdaq indexes fell 0.4%, while the Dow Jones e-minis slipped 0.3%.

A pan-European stock index that lost 2.2% last week has hovered around flat, while Asian stocks have previously weakened, dragged down by a 2.7% loss in Hong Kong and a 1% drop in the Nikkei in Japan.

François Savary, CIO of Swiss wealth manager Prime Partners, said markets increasingly anticipate a scenario of sluggish growth stagflation and high inflation, a headwind for stocks which have hit a series of record highs and declined. trade at expensive multiples.

“You can live with highly valued markets if you have the prospect of future economic growth. But if you think stagflation is becoming a problem and the only option is to tighten policy and kill economic activity, that’s not good for stocks, ”Savary said.

While recent data has shown robust consumer spending and factory activity in the United States, inflation fears are fueled by crude futures near three-year highs of nearly $ 80 a barrel. and European gas prices approaching a record 100 euros per megawatt hour.

That, along with lingering supply problems, could force central banks to tighten policy sooner than expected.

Already, the core US PCE price index, the Fed’s preferred measure of inflation, rose 3.6% in August from a year earlier, its largest increase in three decades, while the Eurozone inflation has hit 13-year highs.

While Fed boss Jerome Powell and other policymakers insist high inflation is transient, Norihiro Fujito, chief investment strategist at Mitsubishi UFJ Morgan Stanley Securities, noted that “Powell also recently started to cover his comments, which has led investors to suspect that he, too, is worried about inflation.

Adding to concerns about growth, investor sentiment in the eurozone fell for the third consecutive month in October.

OIL AND DOLLAR

There might be little relief on the oil front as producer group OPEC Plus will likely stick to existing agreements to produce an additional 400,000 barrels per day (bpd) in November, rather than ramping up production, reported Reuters.

Investors are eagerly awaiting Friday’s monthly US wage data, predicted by a Reuters poll to show 500,000 jobs added last month.

Chart: Non-farm payrolls in the United States

“All roads this week point to the wage bill on Friday, because unless there is a marked deterioration in all labor market indicators in the report, that will likely be the catalyst to cement the decline in November, “wrote Deutsche Bank.

Chart: Inflation in the United States

These concerns have propelled the dollar close to its one-year highs against a basket of currencies and set it on track for its biggest annual rise since 2015.

The greenback eased slightly on Monday, allowing the euro to rebound to $ 1.16270, after Thursday’s 14-month low of $ 1.1563. It also fell to 111.270 yen, remaining below Thursday’s 1-1 / 2 year high of 112.08 yen.

“If you think stagflation is coming, you want to get out of cyclical stocks and into safe havens like the dollar,” Savary said at Prime Partners.

US bond yields edged up slightly, but 10-year yields at 1.49% remained below Tuesday’s three-month high of 1.567%.

The offshore yuan, meanwhile, fell a quarter of a percent to 6.4502, with investors assessing the impact of Evergrande. They were also awaiting a speech from US Trade Representative Katherine Tai on the Biden administration’s strategy for US-China trade relations.

Additional reporting by Hideyuki Sano in Tokyo; Editing by William Maclean and Alex Richardson


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