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Stagflation fears keep equity markets in grim mood By Reuters

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© Reuters. FILE PHOTO: A man looks at an electrical board displaying the Nikkei index outside a brokerage in a commercial district in Tokyo, Japan, on June 21, 2021. REUTERS / Kim Kyung-Hoon

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By Sujata Rao

LONDON (Reuters) – Global stocks fell on Monday and the dollar held near a year-high on concerns that higher inflation, tight supply and problems in China’s real estate sector put the global economic recovery at risk.

Equity markets fell to two-and-a-half-month lows last week, following a torrid September that saw them lose more than 4% when US Treasury yields rose 20 basis points, the Federal Reserve said. signaled its readiness to start rolling back the stimulus this year and China real estate giant Evergrande headed into default.

Those factors remain in play, with Evergrande’s stock being suspended days after a second set of interest payments on offshore debt was lost.

Wall Street was slated to open weaker, with a focus on the fate of the Biden administration’s multi-billion dollar spending plans, Congressional disputes over the Treasury debt ceiling, and Friday’s monthly employment data that may allow the Federal Reserve proceed with the reduction of bond purchases. .

Futures on the Nasdaq indices and the Nasdaq index were down 0.4%, while the Dow Jones e-minis were down 0.3%.

A pan-European equity index that lost 2.2% last week was flat, while Asian stocks previously weakened, led by a 2.7% loss in Hong Kong and a 1% drop.

Francois Savary, CIO of Swiss wealth manager Prime Partners, said markets were increasingly pricing in a stagflation scenario of mediocre growth and high inflation, a headwind for stocks that have climbed a series of all-time highs and are trading at expensive multiples.

“You can live with highly valued markets if you have prospects for economic growth ahead. But if you think stagflation is becoming a problem and the only option is to tighten up policy and kill economic activity, that’s not good for stocks.” Savary said.

While recent data showed strong U.S. consumer spending and factory activity, inflation fears are being stoked by crude futures near three-year highs of nearly $ 80 a barrel and European prices. of gas are approaching a record 100 euros per megawatt hour.

That, coupled with persistent supply failures, could force central banks to tighten policy earlier than expected.

The US core PCE price index, the Fed’s preferred measure of inflation, rose 3.6% in August from a year earlier, its biggest rise in three decades, while euro zone inflation reached 13-year highs.

While Fed chief Jerome Powell and other politicians insist that high inflation is temporary, Norihiro Fujito, chief investment strategist at Mitsubishi UFJ (NYSE 🙂 Morgan stanley (NYSE 🙂 Securities noted that “Powell has also recently begun to cover his comments, leading investors to suspect that he too is concerned about inflation.”

In addition to growth concerns, investor morale in the euro zone fell for the third month in a row in October.

OIL AND DOLLAR

There may be little relief on the oil front, as OPEC and the producer group will likely stick to existing agreements to produce an additional 400,000 barrels per day (bpd) in November, rather than add production, Reuters reported.

Investors are looking forward to Friday’s monthly US payroll data, forecast by a Reuters poll to show 500,000 jobs added last month.

Graphic: US Non-Farm Payrolls https://fingfx.thomsonreuters.com/gfx/mkt/zdpxodwzqvx/Pasted%20image%201632930945719.png

“All roads this week are pointing to Friday’s payroll, as unless there is a marked deterioration across the entire range of labor market indicators within the report, this will likely be the catalyst to cement the November reduction,” he added . German bank (DE 🙂 wrote.

Chart: US inflation https://fingfx.thomsonreuters.com/gfx/mkt/egpbkyxxmvq/21O04A.png

Those concerns have lifted the dollar near a year-long high against a basket of currencies and set it on track for its biggest annual gain since 2015.

The dollar eased slightly on Monday, allowing the euro to rebound to $ 1.16270, down from Thursday’s 14-month low of $ 1.1563. It also fell to 111,270 yen, remaining below Thursday’s one-and-a-half high of 112.08 yen.

“If you think stagflation is coming, you want to get out of cyclical stocks and into safe havens like the dollar,” said Savary of Prime Partners.

Yields on US bonds edged higher, but 10-year yields of 1.49% remained below Tuesday’s three-month high of 1.567%.

Meanwhile, the overseas trade yuan fell a quarter percent to 6.4502 as investors weighed the impact of Evergrande. They also awaited a speech by US Trade Representative Katherine Tai on the Biden administration’s strategy for US-China trade ties.

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