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Markets report: Pessimism returns about inflation fight and ‘chip wars’ take a new twist

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

October’s early optimism has evaporated and pessimistic sentiment has returned about the after-effects on the global economy of the big offensive on inflation. Stocks in Asia retreated, following in Wall Street’s footsteps, after US indices on Friday fell back amid expectations the Federal Reserve will continue to ramp up interest rates following a buoyant jobs report.

The unemployment rate came in at 3.5%, down from 3.7% showing how resilient the labour market still is despite moves taken by the Fed so far. Caution appears to be rising a little among employers but it’s clear a fight for talent is still on, with many companies hesitant about reducing headcount as a precaution even as customers start reining in spending and worries rise about the outlook ahead.

This weakness across equities is expected to persist through the trading sessions to come, with the FTSE 100 has also opened lower amid worries that as the era of cheap money disappears so fast, economies are heading for a hard landing. Nervousness is set to persist ahead of key data in the UK and the US on consumer and producer prices later this week and investors will be hanging on any indications about the Fed’s future moves from the minutes of the Federal Open Market Committee which are due to be released in Wednesday.

Tech stocks in China are in the retreat after another offensive taken by the US in the ‘chip wars’. The US administration has ramped up its new strict rules on exports, which include a measure to prevent China using certain semi-conductor chips made anywhere in the world with US equipment. This development is likely to put a further brake on the Chinese tech sector given the difficulties China has faced in attempting to develop its domestic semiconductor industry.

It’s also likely to continue to weigh on chip makers Nvidia and AMD which were sideswiped on Friday by the ramp up in restrictions. This could hardly come at a worse time for Nvidia given that it’s already faced a highly challenging period due to supply chain snarl ups and slowing demand for gaming consoles. Its artificial intelligence prowess is considered to be the engine for future growth at the company, which is why these strict new rules come as a severe blow. Being at the cutting edge of pioneering industries can be a huge advantage but as this development shows, also presents significant risks.

With the Fed forecast to step on the pedal of rate rises, the dollar is in ascendance yet again, putting pressure on a basket of currencies. The pound is currently hovering around $1.10 battered by the mighty greenback and continuing concerns about the direction of UK government fiscal policy. UK finance minister Kwasi Kwarteng is heading for a key International Monetary Fund meeting this week where his tax plans are set to come under intense scrutiny. His trip comes after the world’s lender of last resort criticised the Truss administration for working at cross purposes to the Bank of England given that policymakers are attempting to rein in inflation, while the government wants to boost demand in a quest for immediate growth.

With the pound languishing at levels against the dollar not seen since the Spring of 1985, the recent rise in oil will translate to even more punishing prices at the pumps, given a weaker sterling makes import prices more expensive. Brent crude has come off a little, but given last week’s 15% jump, fuel prices are going to add to the inflationary pressures the Bank of England is still grappling to keep a lid on.’’

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