Market report: Worries about scorching inflation and a global slowdown keep investors nervous

by | Jul 11, 2022

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

The uncertain outlook is keeping stock markets volatile as worries wax and wane about scorching inflation and a global slowdown while Covid fears rear up again.

Nerves are also frayed given that earnings season is also kicking off this week and US multinationals will be giving updates about how slowing consumer and businesses sentiment and rising costs may be affecting the bottom line.

The FTSE 100 has fallen 1% in early trade, with mining giants topping the lists of fallers. Worries are ratcheting up about the global downturn hitting demand for commodities. Iron ore prices have fallen to levels not seen since December, as stockpiles of steel build up following a slump in the Chinese property sector, while companies tread water impatient for Beijing’s promised infrastructure boost to materialise.

Signs that the Covid horror story is still not quite over are rattling nerves. China has re-imposed strict rules with 30 million people back in lockdown in six cities and region, including parts of Shanghai. Residents are being urged to share heart-warming tales to make isolation more bearable, but the latest crackdown has sent a cold chill across financial markets amid worries fresh supply chain issues and weakening demand will hit, just as hopes of recovery had crept up. What’s particularly perturbing is the discovery of a new variant of Omicron, adding to fears it could spread rapidly to other regions in China.

The central worry affecting stock markets right now is that as central banks around the world take more aggressive steps to dampen down inflation, it will cause demand to fall rapidly pushing economies into reverse. With the American labour market looking so buoyant right now, expectations have risen that the US Federal Reserve will try and deflate red hot prices by hiking interest rates by 0.75% at the next meeting and keep the pressure on in the months to come. Forecasts that this will squeeze out growth in the economy are coming thick and fast, and that’s reflected in the bond markets which are now pricing in a sharp deceleration of inflation over the next few years.

A recession warning light is blinking with the two year bond yields, commanding higher yields than ten year bonds, given that this inversion is often seen as a sign that recession could be looming. Investors who tie up their money for longer periods of time usually are rewarded with higher yields. Right now the curve is indicating that investors expect the Federal Reserve will put its foot down hard on the accelerator of rate rises to rein inflation but then put on the brakes to stop the economy slamming into a brick wall of a deep recession.

In Europe, energy security concerns also rising with the biggest pipeline supplying Russian gas to Germany closing for maintenance. Speculation has swirled that the closure could end up being extended by Russia as part of strong arm tactics to punish European nations for the sanctions imposed for Moscow’s invasion of Ukraine. The progress of repair work will be watched closely and any indication that delays are looming could see a fresh scurry upwards in European gas prices.

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