Uneasy economic outlook grows as price hikes fuel stagflation fears

Over the past few weeks, the stock markets have struggled to make any significant gains, and during that time concerns have grown about a number of different factors.

The lack of a clear narrative, whether positive or negative, has caused markets to rotate back and forth since July, a number of factors raising concerns about the global economic outlook, according to Michael Hewson, analyst at chief market at CMC Markets UK.

Concerns about the regulatory environment in China, skyrocketing energy prices, debates over whether inflation is transient or persistent, how much the global economy is slowing, and whether central banks can consider reducing their bond buying programs, without causing a stir in the market, are keeping investors more and more nervous, and that uncertainty seems to be growing, Hewson said this morning.

Last Friday’s decline in equity markets saw the FTSE100 close below 7,000 for the first time since July, while the S & P500 closed below its 50-day MA for the first time since mid-June.

“It was also coincidentally a triple day of witchcraft, as it did last Friday. At the time, the S&P 500 was able to rebound immediately and, as a result, hit new highs,” Hewson said this morning.

“Another feature of last week’s sell-off was a sharp increase in volume, with all three major indices of the DAX, FTSE100 and S&P 500 recording their highest daily volumes since March,” he added. .

This is probably due in part to various option expiries, as well as volume flows in the DAX, as it is undergoing a big shift towards 40 components, down from 30, as of today.

Growing unease

Nonetheless, the economic outlook is growing uneasy as a growing number of companies anticipate the prospect of rising costs and possible effects on their profit margins, at a time when central banks are under pressure to pull out. the generosity of their current stimulus measures.

“With that in mind, the account of this week’s Federal Reserve rate meeting will likely be critical in determining whether last week’s sell-off is lasting or just temporary,” Hewson explained.

“Recent economic data from the United States has been mixed to say the least, but in the job market it seems there is cause for optimism,” he continued.

Consumer inflation could exceed 4% in the wake of the credit crunch

“Unfortunately for the US central bank, this seems to be the least of its problems given the outlook for inflation expectations, which are on the rise and could well compress spending habits at the end of the year and which have already shaken the economy. consumer confidence, as well as concerns about how the economies will cope with the delta variant of Covid-19 as the weather cools. ”

Hewson pointed out that these stagflation concerns are now starting to be “voiced” with increasing frequency, with the Federal Reserve and the Bank of England likely to make up their minds when they meet later this week.

UK yields

A notable by-product of recent weeks has been to see UK 2- and 5-year yields hit their highest levels since March of last year.

“There could be a number of reasons behind this move, including concerns about the Chancellor’s new fiscal rules, the effect the supply chain disruption and rising energy prices will have on the inflation outlook and any steps the Bank of England may take to address those concerns, when they meet on Thursday, ”Hewson said.

In contrast, the rise in 5-year rates in the United States was much more modest, but they still reached their highest levels since July 2.

With the markets in Japan and mainland China closed today, this morning’s Asian session was negative as concerns about the future of Chinese real estate company Evergrande further escalate, pushing the Hang Seng down sharply.

As a result, today’s European opening looks negative, with the FTSE100 appearing to open at its lowest levels since July 22.

Hewson said the newly formatted DAX should also open lower in the same way.

“As we come to the end of the month, it looks more and more likely that we will see the first negative month since January for the S & P500 and DAX, the bigger question being whether we have seen this year’s highs. , or is this just another opportunity to buy the dip? “

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