Stocks and bonds struggle under stagflation threat

By Sujata Rao

LONDON (Reuters) – Signs that soaring energy prices are putting a dampener on economic growth kept a lid on global stock market gains on Tuesday, while inflation and policy-tightening fears sent short-dated U.S. Treasury yields to 18-month highs.

Oil prices rose further, with Brent crude above $84 a barrel. Coal has scaled record peaks and, while gas prices are off recent highs, they remain four times higher in Europe than at the start of the year.

The impact of supply crunches in power and manufacturing components is showing up in data – figures on Tuesday showed Japanese wholesale inflation hit 13-year highs last month, British shoppers slashed spending, China recorded a 20% drop in car sales and bottlenecks dragged German economic sentiment down for a fifth month.

Stock markets were trying to claw back earlier hefty losses, with a pan-European equity index only marginally in the red around 1115 GMT, while on Wall Street, equity futures pointed to a slight rise for the tech-heavy Nasdaq.

S&P 500 and the Dow futures flatlined however and MSCI’s global index slipped 0.2%.

Earlier, Asian shares lost ground, led by falls of as much as 1.5% in Chinese blue chips and Hong Kong.

With the U.S. earnings season kicking off in earnest this week, investors will want to gauge the impact of inflation on companies’ bottom line.

While the prospect of weaker economic growth sent stocks lower, inflation fears and the likelihood of central bank policy tightening were reflected in bond markets, where two-year Treasury yields hit 18-month highs, up 35 basis points since the start of October.

Ten-year yields rose to a four-month high, undeterred by weaker-than-expected U.S. economic data in recent days as money markets priced interest rates rising from end-2022.

Graphic: Treasury yields https://fingfx.thomsonreuters.com/gfx/mkt/lbvgnonqlpq/Pasted%20image%201633986113887.png

“Markets had bought the message that inflation was transitory and now they are questioning it,” said Sarah Hewin, senior economist at Standard Chartered.

“We take the view that the current rise in costs is a headwind to activity and as such will limit the growth rebound.”

CHINA REAL ESTATE RISKS

Asian markets were also under pressure from China’s property sector, where the stricken Evergrande group missed a third bond coupon payment in as many weeks and signs are growing of trouble at some other developers.

“For the global economy, the Evergrande affair is detrimental to the economic outlook because it risks slowing down Chinese business activity, which still depends heavily on events in the real estate sector,” Francois Savary, CIO at Swiss wealth manager Prime Partners, said.

Chinese economic momentum is clearly slowing; aside from power outages idling some factories and the plunge in car sales, data showed tourism revenues dropped 5% year-on-year during the Oct. 1-7 Golden Week, one of China’s busiest travel periods.

All those concerns, alongside rising Treasury yields, are keeping alive the bid for the dollar. Its index is a whisker off recent one-year highs and stands near a three-year peak against the yen.

Some analysts fear U.S. data due later this week could increase stagflation fears, if they show the consumer price index above forecast and a drop in retail sales.

“The dollar is the likely near-term winner from these outcomes, with both rates and the risk environment dollar- supportive,” Standard Chartered predicted.

Graphic: Gas, CO2 and Coal rebased to the start of the year, showing percentage gains https://fingfx.thomsonreuters.com/gfx/mkt/egpbkmyoovq/Gas%20CO2%20and%20coal%20rebased%20to%20the%20start%20of%20the%20year.jpeg

(Reporting by Sujata Rao, additional reporting by Julie Zhu in Hong Kong; Editing by Emelia Sithole-Matarise, Rachel Armstrong and Alex Richardson)

By Sujata Rao

LONDON (Reuters) – Signs that soaring energy prices are putting a dampener on economic growth kept a lid on global stock market gains on Tuesday, while inflation and policy-tightening fears sent short-dated U.S. Treasury yields to 18-month highs.

Oil prices rose further, with Brent crude above $84 a barrel. Coal has scaled record peaks and, while gas prices are off recent highs, they remain four times higher in Europe than at the start of the year.

The impact of supply crunches in power and manufacturing components is showing up in data – figures on Tuesday showed Japanese wholesale inflation hit 13-year highs last month, British shoppers slashed spending, China recorded a 20% drop in car sales and bottlenecks dragged German economic sentiment down for a fifth month.

Stock markets were trying to claw back earlier hefty losses, with a pan-European equity index only marginally in the red around 1115 GMT, while on Wall Street, equity futures pointed to a slight rise for the tech-heavy Nasdaq.

S&P 500 and the Dow futures flatlined however and MSCI’s global index slipped 0.2%.

Earlier, Asian shares lost ground, led by falls of as much as 1.5% in Chinese blue chips and Hong Kong.

With the U.S. earnings season kicking off in earnest this week, investors will want to gauge the impact of inflation on companies’ bottom line.

While the prospect of weaker economic growth sent stocks lower, inflation fears and the likelihood of central bank policy tightening were reflected in bond markets, where two-year Treasury yields hit 18-month highs, up 35 basis points since the start of October.

Ten-year yields rose to a four-month high, undeterred by weaker-than-expected U.S. economic data in recent days as money markets priced interest rates rising from end-2022.

Graphic: Treasury yields https://fingfx.thomsonreuters.com/gfx/mkt/lbvgnonqlpq/Pasted%20image%201633986113887.png

“Markets had bought the message that inflation was transitory and now they are questioning it,” said Sarah Hewin, senior economist at Standard Chartered.

“We take the view that the current rise in costs is a headwind to activity and as such will limit the growth rebound.”

CHINA REAL ESTATE RISKS

Asian markets were also under pressure from China’s property sector, where the stricken Evergrande group missed a third bond coupon payment in as many weeks and signs are growing of trouble at some other developers.

“For the global economy, the Evergrande affair is detrimental to the economic outlook because it risks slowing down Chinese business activity, which still depends heavily on events in the real estate sector,” Francois Savary, CIO at Swiss wealth manager Prime Partners, said.

Chinese economic momentum is clearly slowing; aside from power outages idling some factories and the plunge in car sales, data showed tourism revenues dropped 5% year-on-year during the Oct. 1-7 Golden Week, one of China’s busiest travel periods.

All those concerns, alongside rising Treasury yields, are keeping alive the bid for the dollar. Its index is a whisker off recent one-year highs and stands near a three-year peak against the yen.

Some analysts fear U.S. data due later this week could increase stagflation fears, if they show the consumer price index above forecast and a drop in retail sales.

“The dollar is the likely near-term winner from these outcomes, with both rates and the risk environment dollar- supportive,” Standard Chartered predicted.

Graphic: Gas, CO2 and Coal rebased to the start of the year, showing percentage gains https://fingfx.thomsonreuters.com/gfx/mkt/egpbkmyoovq/Gas%20CO2%20and%20coal%20rebased%20to%20the%20start%20of%20the%20year.jpeg

(Reporting by Sujata Rao, additional reporting by Julie Zhu in Hong Kong; Editing by Emelia Sithole-Matarise, Rachel Armstrong and Alex Richardson)