Investors wary of inflation trend

Stock markets have turned a little more negative on Wednesday, with Chinese data overnight dealing a blow to sentiment.

It seems there’s a growing list of concerns for investors that spans beyond simply what the Fed is going to do. And this comes despite certain Fed officials giving the impression that they are undeterred by this. That may well change over the coming months.

Inflation is at the forefront of those concerns, perhaps why policymakers are so reluctant to wait, which makes it even more of a concern. Investors have been cracking on under the impression that inflation is transitory – as they’ve repeatedly been told – and tapering will come as a result of the economic recovery rendering it no longer necessary.

Regardless of whether the result is the same, the change in narrative is a worry for investors. Persistent inflation, a slower economic recovery and higher interest rates is not the recipe for stronger equity markets but that appears to be the way we’re heading.

Coming at a time when Covid cases are already rising going into the winter period, potentially meaning more restrictions – or at the very least more cautious behaviour – we may be in for a difficult end to the year for risk assets.

Two hikes priced in as UK inflation surges

The UK is among those experiencing a surge in inflation, with the August reading jumping to 3.2%, ahead of market expectations. One of the drivers is the timing of the Eat Out to Help Out scheme last year, which makes it look worse than it is but this also won’t be where it peaks, which is why some are growing more concerned.

The result is that traders are now pricing in two rate hikes next year, taking the base rate to 0.5% by year-end. While there are areas of concern as far as inflation is concerned, such as higher input prices and the struggle to fill vacancies with skilled workers, I’m still unconvinced by the stickiness of the inflation we’re seeing.

While this won’t necessarily deter policymakers from gradually removing emergency stimulus measures, I still think it will be done with great caution and only as the economy warrants it. Still, that doesn’t mean it won’t be a nervy few months, with inflation expected to peak later in the year.

Bitcoin showing incredible resilience

Bitcoin shows incredible resilience at times and it certainly feels like we’re seeing that right now, with the cryptocurrency making gains for a second day and approaching USD 48,000. This comes despite USD 44,000 once again coming under pressure earlier this week before bulls fought back once more.

A failure at USD 48,000 could be another blow though and perhaps a further correction warning. A move above here could spur more optimism and fuel another rally towards USD 50,000 where it has repeatedly run into resistance.

For a look at all of today’s economic events, check out our economic calendar: www.marketpulse.com/economic-events/

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Craig Erlam

Craig Erlam

Senior Market Analyst, UK & EMEA at OANDA
Based in London, Craig Erlam joined OANDA in 2015 as a market analyst. With many years of experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while producing macroeconomic commentary. His views have been published in the Financial Times, Reuters, The Telegraph and the International Business Times, and he also appears as a regular guest commentator on the BBC, Bloomberg TV, FOX Business and SKY News. Craig holds a full membership to the Society of Technical Analysts and is recognised as a Certified Financial Technician by the International Federation of Technical Analysts.
Craig Erlam
Craig Erlam

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