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Stocks fall again after turnaround Tuesday fails bulls

Fawad Razaqzada Fawad Razaqzada 06/10/2021
Stocks fall again after turnaround Tuesday fails bulls Stocks fall again after turnaround Tuesday fails bulls
Stocks fall again after turnaround Tuesday fails bulls Fawad Razaqzada
  • Rising yields and inflationary pressures hurt sentiment again
  • Inflation expectations continuing to rise
  • Pressure on grows on EM currencies
  • Crude oil and energy stocks could be dragged lower next
  • RBNZ hikes but NZD drops anyway
  • ADP payrolls coming up
 
Another day, another rise in yields… and another drop for equities, emerging market currencies and many other risk-sensitive assets. That has been the underlying trend for the past month or so, and it was no different this morning as European indices and US futures slumped, while the US dollar rose against commodity dollars and emerging market currencies. Here’s how the Spanish Ibex looked like after this morning’s slump:

ESP 35
 
The latest falls for equity indices come after the markets had rebounded noticeably on Tuesday, although as those gains have now evaporated, it more or less confirms Tuesday’s moves were driven in large parts by short-side profit-taking.
 
In FX, The EUR/USD closed in on the 1.15 handle, while the Norwegian krone slumped as oil turned lower.
 

Why are the markets struggling?

 
Well, there are many reasons. But it all boils down to rising yields and inflationary pressures. Bond yields have broken further higher both in Europe and the US as investors fear that the Federal Reserve and other global central banks might be forced to tighten their belts faster than expected to prevent high inflation turn into hyperinflation, and to avoid the risks of stagflation taking hold.

Us 10y yields
 
Energy prices have sky-rocketed, fuelling fears that inflation is not going to be transitory as many central banks – not least the Fed and BoE – have been expecting. Indeed, gas prices in the UK have surged by 40% to fresh record highs. The energy crisis has worsened in Europe, with Dutch gas futures surging over 60% in just two days this week. Rising energy prices is not only impacting households but businesses too, adding to their costs. The net result would be higher prices for the goods and services, potentially meaning lower demand from households, already hit by rising energy prices eating into their own disposable incomes.
 

Inflation expectations continuing to rise

 
With energy prices surging, inflation expectations are rising accordingly. One key measure of long-term Eurozone inflation expectations has today risen to its highest level since 2014. Similar scenes are witnessed for market-based measures of inflation for other western regions, including the UK and US.
 

RBNZ hikes but NZD drops anyway

 
All this come at a time when the global economy appears to be slowing and central banks are starting to tighten their belts. The Reserve Bank of New Zealand becomes the third major central bank to hike interest rates overnight by 25 basis points. This was the first hike in seven years as concerns over rising property prices and inflation outweighed the risks stemming from the spread of coronavirus. Still, the NZ dollar fell, as the rate increase was fully expected and as appetite towards risk-sensitive assets turned sour.
 

Pressure on grows on EM currencies

 
It remains to be seen how the Fed will react if inflation remains persistently high amid the global energy crisis and supply bottlenecks. Until now, the message has been a gradual withdrawal of support. But the markets are thinking otherwise, as yields continue to rise on both short and longer ends of the curve. The dollar is making big gains against some emerging market currencies, with the Indian Rupee dropping sharply again today. India is a major oil importer, so there’s little surprise to see her currency struggle. Keep an eye on Mexican peso, as it has just broken out above 20.70 resistance.
 

Crude oil and energy stocks could be dragged lower next…

 
While growth stocks, especially those in the technology sectors that have low dividend yields, have taken the brunt of the sell-off, we are seeing other sectors come under increasing pressure too. Miners have fallen on concerns over a slowing Chinese economy and tracking falls for Iron ore and a few other base metal prices. Energy companies such as BP and Shell have so far bucked the trend, thanks largely to significantly higher crude oil and gas prices. However, if risk appetite turns decisively sour, we could see energy prices fall back as fears over demand intensify. In fact, crude oil prices fell along with equities today and this pressured share prices of BP and Shell and the like. Banks have so far also bucked the trend, thanks to those rising bond yields. But they won’t be totally immune should you-know-what hit the fan. Still, HSBC got a boost today following a broker upgrade. Elsewhere, Tesco shares jumped after the superstore giant topped first half forecasts, raised guidance and announced a £500 million share buyback scheme.
 
 

Coming up…

 
If stagflation concerns linger, we might see renewed falls for US indices when Wall Street opens later. Already, index futures were down sharply, and trading the day’s lows when this report was written. Investors will be looking forward to the release of ADP private sectors payrolls report and a few other economic pointers later this week, including the official nonfarm payrolls report on Friday. The ADP is expected to reveal 425K jobs were added into the US private sector last month. Jobs growth has slowed down in recent months. If we see further signs of weakening jobs market for the world’s largest economy, then expect to see more jittery price action across risk assets.
Any opinions, news, research, analyses, prices or other information contained on this website is provided as general market commentary and does not constitute investment advice. ThinkMarkets will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.

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Meet our contributors
Fawad Razaqzada
×
Fawad Razaqzada
Market Analyst, London

Fawad is an experienced analyst and economist having been involved in the financial markets since 2010, producing market commentary and research for a number of global FX, CFD and Spread Betting brokerage firms. He leverages years of market knowledge to provide retail and professional traders worldwide with succinct fundamental & technical analysis. Fawad also offers trading education to help shorten the learning curves of developing traders.
 
His colleagues consider him an expert at reading price action on the charts. This together with his deep understanding of economics and fundamental analysis, and trading experience, puts him in a great position to forecast short term price movements. Fawad covers a wide range of markets, including FX, commodities, stock indices and cryptocurrencies and his comments are regularly quoted by the leading financial publications such as Reuters and Market Watch. In addition to ThinkMarkets, Fawad also provides analysis and premium trade signals on his own website at TradingCandles.com.
 
 

Carl Capolingua
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Carl Capolingua
Market Analyst, Melbourne

Carl has over 20 years' experience in financial markets and has held senior analyst roles at a number of financial institutions. Specialising in Australian and US stock markets in particular, Carl uses a top-down approach to assess the global macro picture before using both technical and fundamental techniques to select stocks. He regularly appears as an expert commentator on a number of media outlets throughout the Asia-Pacific region.
 
 
 

Kearabilwe
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Kearabilwe Nonyana
Market Analyst, South Africa

Kearabilwe is an experienced Sales trader and Analyst specialising in Equity and Equity derivatives. His career in the financial markets has seen him hold various positions in global investment banks and global CFD and Spread betting firms. He has deep interest in using quantitative methods to help him understand and teach the fundamental drivers of asset prices.
 
 
 

Fawad Razaqzada
Fawad Razaqzada
Fawad is an experienced analyst and economist having been involved in the financial markets since 2010, producing market commentary and research for a number of global FX, CFD and Spread Betting brokerage firms.
Carl Capolingua
Carl Capolingua
Carl has over 20 years' experience in financial markets and has held senior analyst roles at a number of financial institutions.
Kearabilwe
Kearabilwe Nonyana
Kearabilwe is an experienced Sales trader and Analyst specialising in Equity and Equity derivatives.

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Any opinions, news, research, analyses, prices or other information contained on this website is provided as general market commentary and does not constitute investment advice. ThinkMarkets will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.
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