Stocks and bonds collapse under threat of stagflation

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LONDON, Oct. 12 (Reuters) – A sell-off in global equities continued until Tuesday following signs that soaring energy prices have dampened economic growth, while fears of inflation and Tightening policies have pushed short-term US Treasury yields to 18-month highs.

Oil prices rose again, with Brent crude at nearly $ 89 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 – on Tuesday, data showed wholesale price inflation in Japan to hit a 13-year high last month, UK buyers reported cut spending and China saw a 20% drop in car sales.

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 took into account rising interest rates from late from 2022.

Treasury yields

“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.”

A pan-European equity index (.STOXX) slipped 0.6%, US equity futures pointed to a weaker Wall Street session, and the MSCI world index fell 0.3% ( .MIWD00000PUS).

Earlier, Asian stocks also lost ground, led by drops of up to 1.5% in Chinese (.CSI300) and Hong Kong (.HSI) blue chips.

Asian markets are also under pressure from the situation in 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 some other developers. Read more

“Investors are eagerly watching if there will be any action from Beijing to help resolve Evergrande’s debt problem, which would require comprehensive plans,” said Zhang Zihua, chief investment officer at Beijing Yunyi Asset Management.

Although there is no sign of such assistance, economic dynamics are clearly slowing; Even before car sales fell, data showed tourism revenues fell 5% year-on-year during Golden Week Oct. 1-7, one of the busiest travel times in China. Read more

All of these worries, along with rising Treasury yields, keep the supply alive for the dollar index, which 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 reinforce fears of stagflation, if it shows a higher than expected CPI and lower retail sales.

“The dollar is the likely near-term winner of these results, with both rates and the risk environment favorable to the dollar,” Standard Chartered predicted.

Gas is almost 400% higher than at the start of 2021, while CO2 is 85% higher and coal is up more than 200%

Reporting by Sujata Rao, additional reporting by Julie Zhu in Hong Kong; Editing by Emelia Sithole-Matarise

Our Standards: Thomson Reuters Trust Principles.


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