Stocks drop as inflation rises

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INVESTORS hoping for a dose of summer cheer were dealt another blow as global stock and bond markets plunged lower during the week.

The old financial market adage ‘sell in May, and go away’ – popularised in the Stock Trader’s Almanac with reference to historically weaker performance from equity markets during the period from May to October – is proving itself a reliable axiom once again.

The MSCI World Equity Index fell 8.4%. US headline indices the S&P 500 Index and technology-laden Nasdaq dropped 9.0% and 10.4% on the week respectively, while the Eurostoxx 50, a blue-chip index of leading companies in the Eurozone, tumbled 8.8%.

China was a notable exception. Its domestic Shanghai CSI 300 Index rose 0.6% on renewed hopes of policy easing and a thawing of the heavy-handed regulation and oversight that has frozen game development and listing activity within the ecommerce sector for some time.

Most of the market damage was inflicted in the latter half of the week following the release of the US inflation report.

Surging food and energy prices pushed May’s Consumer Price Index figure to an eye-watering annualised rate of +8.6%, far higher than consensus forecasts and the highest level since December 1981.

The report dented hopes from many forecasters that peak inflation was now firmly behind us, with markets quickly adjusting to the reality that the Federal Reserve might be emboldened to tighten monetary policy in a more aggressive fashion.

Yet another unwelcome development arrived with the publication of the University of Michigan’s survey of consumer expectations.

Consumer confidence for the future was at record lows, while expectations for inflation five and ten years from now are starting to accelerate. That is fuelling concerns that inflationary psychology may be setting in, a state of mind that leads consumers to spend more quickly than they otherwise would, fuelling a rising price spiral.

Government and corporate bond prices subsequently collapsed, with ten-year UK, US and European sovereign bond yields surging higher by 28, 32 and 31 basis points on the week. European bonds were also impacted by European Central Bank President Christine Lagarde confirming the intent to commence raising rates by 25 basis points in July, followed by a further hike in September.

Separately, the World Bank cut its forecast for global economic expansion in 2022 further (from +4.1% down to +2.9%), due to the surge in energy and food prices, supply disruptions triggered by Russia’s invasion of Ukraine and policy-tightening drive by central banks globally.

President David Malpass openly stated that ‘the world economy is once again in danger’.

Closer to home, UK Prime Minister Boris Johnson survived a vote of no-confidence, though the deep discontent within his Conservative Party was laid bare by the 148 votes against him, a bigger rebellion than the one suffered by predecessor Theresa May, who was ousted just six months later. The pound dropped almost -3% on the week as traders expect the political turmoil for Johnson to continue owing to concerns about his long-term leadership credentials.

In corporate news, major US retailer Target joined the list of major earnings disappointments, sinking after cutting its profit outlook for the second time in three weeks on account of soaring merchandise stockpiles and ‘unusually high transportation and fuel costs’.

Meanwhile, the Twitter saga continues with Tesla chief executive Elon Musk threatening to walk away from his deal to buy the company if the social network doesn’t comply with his request for more information regarding fake users and accounts.

Finally in our round-up, some headline-grabbing moves in the crypto currency space (Bitcoin -26.2% and Ethereum -33.3%), capped a tumultuous year so far for coin owners.

Bitcoin’s inability to hold the important $30,000 support level triggered a wave of selling as investors moved rapidly to ‘risk-off’ mode.

Looking ahead, all eyes will be on today’s US Federal Reserve policy meeting, where policy makers are widely expected to approve an interest rate increase of at least half a percentage point.

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