- 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.
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.
Source: 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.
Learn and earn more today.
Visit our Education Centre