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DJIA creaking as stagflation concerns mount

Fawad Razaqzada Fawad Razaqzada 15/09/2021
DJIA creaking as stagflation concerns mount DJIA creaking as stagflation concerns mount
DJIA creaking as stagflation concerns mount Fawad Razaqzada
  • Stagflation concerns could derail equities rally
  • Chinese economy slows further
  • Crude oil, natural gas and electricity prices surge
  • UK inflation jumps, Pressure grows on BoE to hike
  • Dow creaking as chart turns bearish
 

Stagflation concerns could derail equities rally

 
We have seen increased signs of risk aversion across the financial markets in recent days, possibly because of fears over a slowdown in economic growth and rising inflation – or in other words, stagflation. US government bond prices have started to rise again while volatility for equity markets have picked up somewhat and the safe-haven Japanese yen is just waking up from its summer slumber. Although some European indices and all major US index futures managed to regain some ground in the first half of today’s session, I wouldn’t be surprised if they go down again later on in the day.
 

Chinese economy slows further

 
Overnight saw another big drop for equities in China and Hong Kong. This was in response to fresh data showing a marked slowdown in economic activity at the world’s second largest economy. China’s August retail sales came in at just +2.5% y/y when +6.9% was expected, slowing down sharply from 8.5% in July as the impact of the post-lockdown boom faded further. Industrial production eased to +5.3% y/y from +6.4% previously, missing expectations of +5.8%. The disappointing data further weighed on an already downbeat sentiment towards Chinese equities.
 

Crude oil, natural gas and electricity prices surge

 
Meanwhile inflationary pressures are continuing to grow across the world. Crude oil prices broke to a new multi-week high, with Brent well above $74 and WTI taking out $71 handle. Natural gas prices likewise showed no signs of abating, rising another 3.8% on the session. Electricity prices have hit record highs in many places.
 

UK inflation also jumps

 
In line with most other regions in the world, the latest UK data shows that consumer inflation has jumped to 3.2% in August, its highest level since 2017 after the biggest ever monthly increase of 0.7% was recorded both on the headline and core fronts. Core CPI rose to 3.1% from 1.8%, while RPI jumped to 4.8%. Meanwhile PPI input and output prices both increased further, suggesting manufacturers are passing on raised input costs to the consumer. Inflation was boosted by restaurant prices soaring.
 

Pressure grows on BoE to hike

 
The big monthly jump in CPI suggests accelerating inflation is not entirely due to base effects. So, what this means insofar as monetary policy is concerned is that the Bank of England is becoming increasingly under pressure to start tightening its belt, especially with the country being ahead in vaccination race. While an imminent rate increase is highly unlikely, if policymakers at the BoE next week suggest that the conditions have now been met for tighter conditions going forward, then this should get the pound excited again. The markets are now expecting 2 rate hikes next year, with short sterling futures pricing in the highest BoE rate expectations in the year ahead since before the pandemic.
 

Dow creaking

 
Although not completely broken, the Dow Jones Industrial Average is one to watch closely as stagflation concerns mount (see above). The index has already broken its short-term bullish trend line. On Tuesday, the recovery attempt was thwarted by the bears who stepped in right where they should have, at 35K. The resulting sell-off helped to create a large bearish engulfing candle on the daily, suggesting more weakness is likely to follow. We have now seen a few lower lows as well. The chart is starting to look bearish. If you are bullish or long proceed with extra care.

US30Source: ThinkMarkets and TradingView.com
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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