Market report: Hotter inflation lifts rate rise expectations, Wall Street gains and Ether soars

Written by Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown

With inflation running at 9.4% there is no escaping the heat in the economy and it’s going to make policymakers at the Bank of England sweat.

They face the supremely tricky task of rapidly cooling down prices, without pushing growth into the deep freeze. The economy sorely needs to be doused by a bucket of ultra-cold water, but the labour market is still red hot and promises of tax cuts by Prime Ministerial contenders risk seeing prices staying elevated as demand for goods and services is kept higher.

The likelihood is growing that this fresh scorcher of a reading will mean the Bank of England will push up rates by 0.5% at the meeting in August. The governor of the Bank of England Andrew Bailey has reiterated that it’s inflation which is the clear and present danger facing the economy right now. In a speech at the Mansion House last night he stressed that it would continue to be the focus and that there were no ifs and buts in the Bank’s commitment to the 2% target.

There is also growing expectation that the European central Bank will also hike rates by as much as 0.5% tomorrow to try and alleviate the Eurozone’s own inflation migraine. The worry is that the higher borrowing costs this would bring might pile up more problems for indebted nations, like Italy, so a plan appears to be afoot to offer special support on the bond markets to ensure that fresh financial woes don’t hit.

With expectation that the Nordstream 1 pipeline will reopen on schedule after maintenance work tomorrow, it has helped ease immediate fears about a fresh energy shock with European gas prices dipping back slightly, but nations are still scrambling to ensure gas reserves are filled before an highly uncertain winter approaches.

Brent crude is hovering just under $107 after dipping slightly after three straight sessions of gains after industry data pointed to a rise in US crude inventories. Amid hopes an immediate energy crunch will be averted European indices are expected to open in positive territory as short term relief continues to wash through the markets.

Fears of a damaging US recession have also receded a little in the rear view mirror with Wall Street closing at a three-week high following some more upbeat earnings reports. The relief rally was prompted by a raft of higher profits from companies across a range of sectors including toy manufacturer Hasbro and oilfield services provider Halliburton. Netflix provided some after-hours cheer, rising by 8% as fewer subscribers than expected ditched the streaming giant, but with 1 million customers signing out, it’s clear the company has its work cut out in developing new content to lure them back in and grow its base elsewhere.

Investors are clinging onto any positive news they can but the claws of the bear market have scratched deep. There will need to be plenty more signs that a recession could be avoided and inflation is being brought under control before US indices can emerge from its clutches.

Ether is the stand out coin in the crypto world right now, and has been soaring in value as speculators bet that an operational change could see a fresh pile on. The crypto currency has risen by 49% over the past week and is up by another 2% since yesterday. It’s partly due to high hopes that the crypto winter could be thawing and that coins may have hit a nadir but Ether’s raced past modest gains achieved by Bitcoin.

Crypto fans have latched onto an upcoming upgrade to how Ether transactions are validated, which has been hyped as ‘The Merge’. The network is moving to proof of stake system, which has emerged as an alternative to crypto mining, or what is known as the ‘proof of work’ process.

Instead of miners being more likely to add blocks to the blockchain if they generate more computer power, by staking, users are more likely to be randomly selected to add blocks if  they lock away more currency. The proof of stake system is viewed by some as a way the crypto world can limit its environmental footprint and burn less energy.

Crypto mining has been highly criticised for contributing to climate change due to its energy intensive nature and as wildfires rage across Europe and the United States, the promise that Ether transactions could be less damaging to the environment has caused a wave of interest. With the rules of the future games of mining, staking and trading still pretty murky, and the value of crypto assets hugely sensitive to volatile conditions in financial markets,  it’s clear investing in the crypto Wild West is still a very risky business. Investors should only dabble at the fringes of their investments with money they have to be prepared to lose.

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