Stocks and bonds fall as energy prices rise alarmingly around the world, adding to inflation concerns.
Stocks start the week in risk-off mode, while bond market sellers are in effect with rising yields – the 10-year US Treasury yield is back at 1.6% as central banks are betting that rates will hike sharply must earlier than they would have liked.
UK short-term government bonds are trading at their highest level since 2018. The two-year gilt is up 0.11% today to 0.68%.
Bank of England Governor Andrew Bailey, in his comments at yesterday’s online conference (Sunday October 17), made his boldest statement yet as he pulled away from the temporary inflationary stance.
In an early turn from this previous position, he said on Sunday that inflationary pressures “will last longer and as a consequence it will of course be longer in the annual figures”.
After last week’s weak end, the Dollar Index (DXY) is trading higher at 94.124 today as Treasury yields steady.
BoE Bailey on inflation: “This is another signal that we must act.”
Adding other recent comments on the need to take action against inflation sooner rather than later, Bailey said the energy price situation “has raised central banks’ fear and concern about embedded expectations. That is why we have signaled from the Bank of England, and this is another signal, that we must act. But of course this action comes in our monetary policy meetings. “
The governor’s remarks follow a similarly sharp tone from Michael Saunders, the hawk of the Monetary Police Committee last week.
Traders now expect the Bank of England to hike rates up to 1% by August next year, compared to 0.1% today.
However, there are now concerns about the risk that central bankers could make a serious mistake in policy by not raising enough either too quickly or in the short term, forcing them to take more drastic action later.
Adding to the nervousness about inflation was the news from New Zealand that price hikes rose from 3.3% to 4.9% a year in the second quarter, beating the 4.2% forecast by economists.
A senior economist at New Zealand’s ASB Bank commented on the data: “We can now see annual CPI inflation above 5% through the end of this year.”
Crude oil prices will continue to recover, with West Texas Intermediate trading at 82.66, its highest level since 2014, and Brent Crude near $ 86.
China’s GDP growth rate is falling
China’s GDP data added to the slowdown, with third-quarter inflation slowing at 4.9%, its lowest rate in a year. That was 7.9% in the second quarter through June. China is also struggling with soaring energy prices, particularly in the coal market, from which up to 70% of the country’s energy generation comes from.
Producer price inflation in China is 10.7% – the highest since 1995, fueled by energy price inflation, but also by supply bottlenecks elsewhere in the economy, causing other product price increases and affecting production due to bottlenecks and disrupted supply chains. Yesterday, 95 ships lined up to enter Shenzhen, a sign of the congestion in China and the world’s major ports.
El-Erian: Fed has to end bond purchases, higher volatility is imminent
In a statement to Fox News on Sunday, eminent commentator Mohamed El-Erian, Allianz chief economic advisor and president of Queens’ College Cambridge, said the time has come for investors to prepare for the volatility ahead. “I’m a little worried that this wonderful world we live in, with low volatility, anything that goes up, could stall with higher volatility,” said El-Erian, Allianz SE chief economic advisor and president of Queens’ College, Cambridge, said on Fox News Sunday.
He believes the Federal Reserve must pull back in order to keep juicing the financial markets. the Fed “should ease monetary stimulus,” says El-Erian.
Stocks and bonds ride a wave of liquidity – but waves tend to break
“If I were an investor I would realize that I am riding a huge wave of liquidity thanks to the Fed, but I would remember waves breaking at some point, so I would be very vigilant,” he warned.
He warned that if prices rise, we will see “at least another year of high and sustained inflation”.
“Things get worse before they get better. So we will have more goods shortages. We will have higher prices. Inflation will stay at 4 to 5%. “
Inflation is said to be less fleeting, Bitcoin rises to USD 62,000
El-Erian’s thoughts on heightened inflation lasting longer than previously expected were taken up by Andrew Ticehurst, a strategist at Nomura Holdings. “The global issue is that higher inflation is likely to be less temporary than previously anticipated given increased commodity prices.”
The bright spots for investors lay in energy-oriented stocks, in Europe stocks of oil and gas companies rose.
Less risk averse investors will also watch Bitcoin’s progress, which has accelerated its recent rally, as market participants believe a Bitcoin futures ETF is likely to be approved by the SEC this morning. Currently priced at $ 61,814, the leading cryptocurrency is approaching its all-time high of $ 64,800.
About Gary McFarlane PRO INVESTOR
Gary was the production editor for the prestigious UK investment magazine Money Observer for 15 years. He covered topics as diverse as social trading and fixed income exchange traded funds. Gary initiated the coverage of Bitcoin and cryptocurrencies at Money Observer and was a cryptocurrency analyst for the UK investment platform No. 2 Interactive Investor for three years until July 2020. In that capacity, he provided expert commentary for a variety of newspapers and other media outlets, including the Daily Telegraph, Evening Standard, and The Sun. Gary has also written a lot about cryptocurrencies for various industry publications such as Coin Desk and The FinTech Times, City AM, Ethereum World News and InsideBitcoins. Gary is the winner of the Cryptocurrency Writer of the Year at the ADVFN International Awards 2018.