Screens red on Bleak Friday as investors assess possibility of an inflationary energy shock

by | Apr 1, 2022

 Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown, brings us her latest daily market update. Today she highlights why, with all the household cost increases taking effect from today that, when it comes to an energy shock, as Bachman Turner Overdrive belted out in 1974 we ” ain’t seen nothing yet”.

‘’Screens have turned red on Bleak Friday as investors fret about the growing possibility that inflation will fly up above current sky-high forecasts, causing another richochet of problems for consumers and corporates. Following falls on Wall Street, markets in Asia headed lower and European indices are expected to open flat after losses accelerated at the end of trading yesterday. The closely-watched US jobs figure is out later, which is likely to mean a wait-and-see approach is on the cards for the FTSE 100, with investors assessing if a buoyant labour market reading might make the Federal Reserve even more inclined to follow an aggressive path on hiking interest rates.

“In the UK, the big bill day that millions of households have been bracing for has arrived, as people face the financial pain of higher energy costs, water rates, council bills, and vehicle duty, this month. Worries are mounting that we ‘ain’t seen nothing yet’ in terms of an energy shock.

“Playing on traders’ minds right now is the energy arm wrestle tactics being used by President Putin to force countries relying on Russian gas to pay in roubles. Germany is holding firm in this financial standoff, but faced with its supply being cut off.  it’s already triggered the first phase of its emergency plan and has taken the first official steps towards gas rationing. Last year, Russia supplied almost a third of Germany’s gas and crude needs, so turning off the taps would hurt their economy. Half the country’s households rely on gas to heat their homes, while it’s also essential to power large manufacturing plants, which is why the government has been scrambling to find alternative sources of energy.

“European natural gas prices have popped higher, to two-week highs, up by around 5% to €125 per megawatt hour. Although the price is nowhere near the record spike of €227 we saw in early March, prices stood at just €20 per megawatt hour a year ago, an increase of over 1,000%. Governments, companies and consumers are now back in the brace position, fearing yet more price hikes are on the way, as the war in Ukraine looks set to become more entrenched and the big squeeze on energy supply is set to continue.

“The Shanghai shutdown and Beijing’s firm line on its zero covid strategy are firmly on the radar as an obstacle to Chinese economic growth. Another manufacturing industry snapshot is out, the Caixin China PMI index, showing further contraction in factory output since the start of the year. Both output and new orders contracted as sharply as they have since February 2020, during the first wave of the pandemic, and exports plummeted and delivery times lengthened markedly. It’s a warning light, indicating that lockdowns are causing fresh supply chain snarl ups, another driver of higher prices.’’


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