Friday Roundup: High and persistent inflation boosts risk aversion in markets; What to watch for

by Market Updates and Alerts |

Investors reduce positions in speculative assets and prioritize safe havens such as the dollar and sovereign bonds

The tone in the markets is marked by risk aversion. This morning, equity markets operate in the red both in Europe and among US index futures. And cryptocurrencies, which are the best indicator of the market’s acceptance of risk, were also down this morning – even as Bitcoin was reducing the magnitude of its drop.

The bad mood in the markets is mainly due to inflation, whose continued high levels reinforce the arguments in favor of a more rigid monetary tightening by the Fed. Futures indexed to the S&P 500 retreated around 0.5%, while the Nasdaq’s decline exceeded 1%. The European Stoxx 600 even lost 2%, but soon reduced the pace of decline.

The dollar recovered for the sixth consecutive session, appreciating against a group of ten currencies, and is already touching the highest level since May 2020. Treasury bonds also gained value, evidencing investors’ search for financial safe havens. Walt Disney Co. declined by 5% in negotiations prior to the opening of the stock exchanges, after moderating its growth prospects..

Digital currencies have fallen again as demand for speculative assets is fading. A massive sale of digital currencies took more than $200 billion of wealth out of the market in just 24 hours, according to estimates by the price tracking website CoinMarketCap. The broad dip in the cryptocurrency system, driven by the collapse of the TerraUSD stablecoin, has hit major tokens hard. Bitcoin has dropped as much as 10% on the last day to its lowest level since December 2020 (it was quietly returning to the positive field a moment ago). Ethereum’s loss reached 16% in the period and today the digital currency was down (-3.60% at 8:15 am GMT).

Reality shock

The realization that inflation persists at high levels disappointed the market a lot. A key indicator of consumer prices in the United States rising more than expected in April on a monthly basis, underlining the weight of inflation on purchasing power and prompting the Federal Reserve to raise interest rates aggressively.

Everyone expected prices to begin to stabilize. But the core consumer price index, which excludes food and energy, rose 0.6% from a month ago and 6.2% from April 2021, according to yesterday’s data. Broad CPI rose 0.3% month-on-month and 8.3% year on year, still among the highest readings in decades. In March, the rate had been 8.5%.

The inflationary movement leads to the reading that, instead of increases of 0.5 percentage points, the Fed will hold its hand in raising interest rates to 0.75 points. And this policy ignites fears of a recession, as world economies are already feeling the impact of the Russian-Ukrainian war and the restrictions on mobility in China due to Covid-19.

Without much macro help. The macroeconomic data agenda is not strong enough to dispel fear in markets, which was also negative in Asia. The most relevant data will be the US producer price index (PPI).

Thursday’s numbers

Dow Jones (-1,02%), S&P 500 (-1,65%), Nasdaq Composite (-3,18%), Stoxx 600 (+1,74%), Ibovespa (+1,25%)

Inflation was the cause of another day of losses for US markets. Despite Tuesday’s gains, the downtrend continues to dominate as investors are weighing slower economic growth amid a high cost of living. Also hurting business was Atlanta Fed Chairman Raphael Bostic’s statement that the central bank is ready to “move forward” on monetary tightening if high inflation persists.

What to watch for

Friday

  • US: PPI/Apr; Initial Applications for Unemployment Subsidy; OPEC Monthly Report
  • Europe: Germany (Current Account); United Kingdom (GDP/1Q22; Business Investment/1Q22; Public Expenditures; Construction Production/Sea; Industrial Production; Service Sector Index; Trade Balance)
  • Asia: Japan (Trade Balance/Mar; Bank Loans/Apr); China (New Loans)
  • Latin America: Brazil (Growth of the Services/Sea Sector); Mexico (Industrial Production/Sea); Argentina (CPI/Apr)
  • Central Banks: Speech by Mary Daly (Fed). Bank of Japan Opinion Summary
  • Balance sheets: SoftBank, Siemens, Allianz, RWE, Telefónica, Affirm, Commerzbank

Monday

  • US: 5-year Inflation Expectations – Univ. Michigan/May; Michigan Consumer Confidence Index/May; Prices of Imported and Exported Goods/Apr
  • Europe: Eurozone (Industrial Production/Sea); Spain (IPC/Apr)
  • Asia: China (Foreign Direct Investment; GDP/1Q22)
  • Latin America: Brazil (IBC-Br; Foreign Exchange Flow)
  • Central Banks: Speeches by Neel Kashkari and Loretta Mester (FOMC/Fed); Isabel Schnabel and Luis de Guindos (BCE)
  • Balance sheets: Toshiba, Deutsche Telekom