HL’s Susannah Streeter: Pessimism descends on financial markets as worries about stagflation loom

global growth
  • FTSE 100 set to open lower amid downbeat assessment of UK economy and global growth.
  • All eyes on the European Central Bank as the era of easy money comes to an end.
  • China’s exports surge in May but Covid lockdown worries linger.
  • Oil rises again, with Brent crude nudging $124 a barrel as supply concerns continue.

Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown:

‘’The downbeat assessment of the prospects of the UK economy and warnings of trouble ahead for global growth are set to see a layer of pessimism descend on the London market. Warnings from the OECD that the world is paying a hefty price for Russia’s invasion of Ukraine are crystallising concerns that the months ahead are set to be very difficult to navigate for many companies and consumers.

“The FTSE 100 is expected to open lower, following fresh losses on Wall Street with the S&P 500 dipping 1% and the tech-heavy Nasdaq falling 0.7%.  Worries are ratcheting up about 1970s style stagflation settling in amid the spiral higher of prices and sharply deteriorating economic prospects. Some support is coming from more encouraging data showing China’s exports grew at a much faster rate than expected in May, as tough Covid restrictions were relaxed in Shanghai – a major tech and manufacturing hub.

“But there are lingering concerns that China’s brisk recovery could be a false dawn given that the zero-Covid strategy is staying firmly in place and that could mean rolling lockdowns will continue. Already residents in yet another Shanghai district, Minhang, have been confined to homes ahead of mass testing scheduled for the weekend.

Overall there is a ‘wait and see’ mood pervading financial markets, as investors brace for a jolt of tightening from the European Central Bank, ending the long easy-money era. This is a complex game of trying to rein in escalating inflation, while not suffocating growth and the opening gambit is set to be ceasing the mass bond buying scheme, The Asset Purchase programme later this month. All eyes will be on what moves are flagged next, with the start of interest rate hikes expected in July, but just how fast and how high the ECB will go in trying to keep a lid on surging prices isn’t clear.

“The Bank has signalled it would prefer to follow a gradual approach of a series of 0.25% rises, but with central banks in Australia and India already employing tougher tactics this week, the likelihood of a harder line emerging from the ECB is growing fast.

Fresh inflationary pressures are coming from the march upwards again in the price of oil, with a barrel of the benchmark Brent Crude nudging $124. There are expectations oil will surge even higher as supply concerns take hold, amid the entrenched war in Ukraine and the expectation for demand to rebound in China as Coronavirus curbs are lifted.  

“The UAE oil minister, Suhail al-Mazrouei has become latest voice warning of a lack of supply in the market forecasting prices have a way to run. Although the UAE and Saudi Arabia could expand production, other OPEC members are struggling with hitting targets and overall there isn’t the capacity to close the supply gap created by the bans slapped on Russian oil.’’’

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