Stocks and bonds struggle under threat of stagflation
LONDON, Oct. 12 (Reuters) – Signs that soaring energy prices are slowing economic growth held back gains in global stock markets on Tuesday, while fears of inflation and political tightening pushed up yields in the Short-term US Treasury at 18-month highs.
Oil prices rose further, with Brent crude surpassing $ 84 a barrel. Coal has reached record highs and, although gas prices have reached recent highs, they remain four times higher in Europe than at the start of the year.
Impact of supply shortages in electrical and manufacturing components show up in data – Tuesday’s figures showed Japanese wholesale inflation hit 13-year highs last month, UK buyers cut spending China saw a 20% drop in car sales and bottlenecks caused the German economy to feel down for a fifth month.
Stock markets were trying to recoup previous heavy losses, with a pan-European stock index (.STOXX) only slightly in the red around 11:15 a.m. GMT, while on Wall Street, stock futures showed a slight rise for the Nasdaq, rich in technology.
However, the S&P 500 and Dow futures stagnated and the MSCI World Index slipped 0.2% (.MIWD00000PUS).
Previously, Asian stocks had lost ground, led by drops of up to 1.5% in Chinese (.CSI300) and Hong Kong (.HSI) blue chips.
With the US earnings season kicking off this week, investors will want to assess the impact of inflation on corporate earnings. Read more
As the prospect of weaker economic growth drove stocks down, inflation fears and the likelihood of central bank policy tightening were reflected in bond markets, where Treasury yields at two years hit 18-month highs, up 35 basis points since early October.
Ten-year yields hit a four-month high, undeterred by weaker-than-expected US economic data in recent days as money markets factored in rising interest rates from late from 2022.
“The markets had accepted the message that inflation was transient and now they are questioning it,” said Sarah Hewin, senior economist at Standard Chartered.
“We believe that the current rise in costs is a drag on activity and as such will limit the rebound in growth.”
REAL ESTATE RISKS IN CHINA
Asian markets have also come under pressure from the Chinese real estate sector, where the struggling Evergrande group missed a third bond coupon payment in as many weeks and signs of trouble are growing among other developers. Read more
“For the global economy, the Evergrande affair is detrimental to the economic outlook as it risks slowing the activity of Chinese companies, which are still heavily dependent on events in the real estate sector,” said François Savary, CIO of the Swiss wealth manager Prime Partners.
Chinese economic dynamics are clearly slowing down; Aside from power outages that are slowing some factories and falling car sales, data shows tourism revenues fell 5% year-on-year during Golden Week October 1-7, one of the periods busiest travel routes in China. Read more
All of these worries, along with rising Treasury yields, are keeping the dollar supply alive. Its index is a stone’s throw from recent one-year highs and sits near a three-year high against the yen.
Some analysts fear that US data due later this week will heighten fears of stagflation, if it shows a higher than expected consumer price index and lower retail sales.
“The dollar is the likely near-term winner of these results, as rates and the risk environment are favorable to the dollar,” Standard Chartered predicted.
Reporting by Sujata Rao, additional reporting by Julie Zhu in Hong Kong; Editing by Emelia Sithole-Matarise, Rachel Armstrong and Alex Richardson
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