Stagflation fears keep equity markets in a sombre mood

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LONDON (Businesshala) – World stocks were on the back foot on Monday and the dollar held near one-year highs on concerns that high inflation, supply crunch and woes in China’s asset sector would put the global economic recovery at risk.

FILE PHOTO: Pedestrians leave and enter the London Stock Exchange in London, Britain August 15, 2017. Businesshala/Neil Hall/File photo

The stock market slid to 2-1/2-month lows last week, following a September one that shed them more than 4% as US Treasury yields rose 20 basis points, with the Federal Reserve unwinding this year. Chinese property giant Evergrande is poised to default.

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Those factors remain at play, days after trading in Evergrande shares was suspended, after it missed a second set of interest payments on offshore loans.

Wall Street was prepared to open weakly, with a focus on the fate of the Biden administration’s multi-trillion-dollar spending plans, Congressional wrangling over Treasury debt limits and Friday’s monthly jobs figures that may allow the Federal Reserve to proceed to reduce its bond-buying. .

Futures for the S&P 500 and Nasdaq indices were down 0.4%, while the Dow Jones E-Minis slipped 0.3%.

A pan-European equity index that lost 2.2% last week was seen around flat, while Asian stocks weakened earlier, led by Hong Kong’s 2.7% and Japan’s Nikkei 1%.

François Savery, CIO of Swiss wealth manager Prime Partners, said markets were increasingly pricing in a bearish scenario of weak growth and high inflation, a headwind for the stock, which has propelled a series of record highs and at costly multiples. have done business.

“You can live with highly valued markets if further economic growth is expected. But if you think inflation is becoming an issue and the only option is to tighten policy and end economic activity, then This is not good for equities,” said Savari.

While recent data showed strong US consumer spending and factory activity, inflation fears were fueled by crude futures hitting a three-year high of around $80 a barrel and European gas prices approaching a record 100 euros per megawatt hour. Is.

That, coupled with persistent supply disruptions, could force central banks to tighten policy sooner than expected.

Already, the main US PCE price index, the Fed’s preferred inflation measure, rose 3.6% in August from a year ago, its biggest increase in three decades, while euro area inflation hit a 13-year high.

While Fed boss Jerome Powell and other policymakers stressed that high inflation is temporary, Norihiro Fujito, chief investment strategist at Mitsubishi UFJ Morgan Stanley Securities, said, “Powell has recently begun to hedge his comments as well, leading to Investors suspect he is also concerned about inflation”.

Adding to growth concerns, investor morale in the euro area fell for the third straight month in October.

oil and dollar

There may be some relief on the oil front as OPEC Plus a group of producers will stick to existing agreements to produce an additional 400,000 barrels per day (bpd) in November instead of potentially adding output, Businesshala reported.

Investors are waiting for Friday’s monthly US payroll data, forecast by a Businesshala poll, to show the 500,000 jobs added last month.

Deutsche Bank wrote, “All roads this week point to payrolls on Friday, unless there is a significant drop in the full sweep of labor market indicators within the report, likely the catalyst for consolidating November’s decline.” Will happen.”

Those concerns have lifted the dollar to a one-year high against a basket of currencies and put it on track for its biggest annual increase since 2015.

The greenback eased slightly on Monday, allowing the euro to jump to $1.16270, lower than Thursday’s 14-month low of $1.1563. It declined to 111.270 yen, down from Thursday’s 1-1/2-year high of 112.08 yen.

“If you think inflation is coming in, you want to get out of cyclical stocks and go to a safe haven like the dollar,” said Savary at Prime Partners.

US bond yields rose higher, but the 10-year yield was lower at 1.49%, lower than Tuesday’s three-month high of 1.567%.

Meanwhile, the offshore-traded yuan fell a quarter percent to 6.4502 as investors weighed the Evergrande effect. He also awaited a speech by US Trade Representative Catherine Tai on the Biden administration’s strategy for US-China trade relations.

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

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