Fears of a return of ‘stagflation’ – high inflation and low growth – are spreading across world markets after a disappointing jobs report from the U.S. and continued rallies in world energy prices – including crude oil, which hit a new seven-year high overnight. The Bank of England is shifting rapidly into rate hike mode. But there’s relief in China at signs that the clampdown on tech fortunes may be more bark than bite, as Meituan escapes from a market abuse probe with a slap on the wrist. Here’s what you need to know in financial markets on Monday, 11th October.
1. Stagflation fears grow
The dollar came off its Friday highs as the market digested an employment report that pointed to a high-inflation-low-growth combination in the U.S. for the near term.
In a note to clients on Sunday, Goldman Sachs (NYSE:GS) shaved another 0.1% from its growth forecast for this year to 5.6%, and also cut its forecast for 2022 to 4%, from 4.4% previously, citing a “longer-lasting drag on virus-sensitive consumer services spending” along with the fading effects of previous stimulus.
Friday’s report had fallen well short of expectations, with the U.S. economy creating only 194,000 jobs in the month. Average earnings also rose more quickly than expected. What caught analysts’ eye was chiefly the failure of more people – especially women – to return to the workforce, something seen by many as a sign of how families are struggling to overcome the disruption to working patterns from the pandemic.
All in all, the report nailed on expectations of a start to the reduction of bond purchases by the Federal Reserve in November.
2. China’s clampdown – more bark than bite?
Sentiment toward Chinese ADRs looks set for a change for the better, after food delivery giant Meituan escaped with a relatively light fine for market abuse violations – one of the highest-profile cases in a broad attack by the authorities on some of China’s most valuable technology-based companies in recent weeks.
The State Administration for Market Regulation fined the Tencent-backed company only $534 million, causing its stock in Hong Kong to leap by 8.4%.
In the background, however, the country’s real estate sector continues its drawn-out battle with the bond markets. Credit spreads on Chinese corporate dollar bonds hit an all-time high overnight, as China Evergrande prepared to miss full payment on yet more of its debt.
3. Stocks set to slide at open; Southwest in focus
U.S. stock markets are set to open lower later, under pressure from the combination of slowing growth and rising prices visible in an increasingly broad set of markets. Trading may be subdued somewhat by the calm before the storm of third-quarter earnings season, and by the Columbus Day holiday, which will keep the cash market for Treasuries closed.
Stocks likely to be in focus later include Hasbro (NASDAQ:HAS), whose CEO said he would take extended leave due to illness, and Southwest Airlines (NYSE:LUV), after another traumatic weekend snarled by flight cancellations. Emerson (NYSE:EMR) Electric may also come under pressure after a report that it may spin off its industrial software business into a joint venture with Aspen Tech.
4. Sterling gains as Bank of England shifts into hike mode
The U.S. jobs report may have done little to clarify when the Fed may raise interest rates but across the Atlantic, it’s starting to look much more clear-cut.
Two top Bank of England officials signalled an imminent increase in rates in interviews at the weekend, Michael Saunders saying households should brace for “significantly earlier” rate hikes and Governor Andrew Bailey expressing concern at how inflation expectations have started to rise.
That’s despite widespread expectations that the economy will slow sharply in the final months of the year due to higher energy prices and benefit cuts reducing households’ disposable income.
5. Oil surges to new seven-year high on stagflation hedging
Crude oil prices surged to fresh seven-year highs as the localized supply shortages in a number of pockets of the global energy market were intensified by investors seeking protection against ‘stagflation’ by betting on still-higher prices. Net long speculative positions in crude oil rose to their highest in eight weeks according to CFTC data released on Friday..
There was yet more bad news on the supply side over the weekend, as flooding hit a large part of China’s coal belt, hitting production at a string of key mines and squeezing spot markets for alternative fuels still harder. The authorities have already lifted official electricity prices for industrial consumers in an effort to relieve the economic pressure on cash-strapped utilities. In better news, India’s government played down suggestions of coal shortages at the country’s power plants.
Elsewhere, Russia’s ambassador to the EU told the Financial Times that the gas shortage in Europe could be solved quite easily if the bloc would stop view Russia as a “partner” rather than an “adversary”.