Stock markets around the world suffered heavy losses this week as inflation concerns re-emerged. With the recovery from the pandemic-induced downturn gathering pace, the impact of rising prices – and the higher interest rates that central banks are likely to deem necessary to keep them under control – has cast a cloud over future company earnings prospects.
On Wednesday, the United States announced a sharp jump in April CPI (consumer price inflation) to 4.2% – the highest figure since the financial crisis, and some way above analysts’ expectations. This followed similarly high inflation numbers from China, which had already sent markets tumbling at the start of the week.
Rising inflation figures around the world come as no surprise as economies bounce back from the impact of the pandemic. Prices weakened considerably in spring 2020 as the first lockdowns were imposed, and current inflation readings – which compare current prices with those 12 months ago – are therefore significantly higher than normal as a result.
The question for investors and central bankers is whether this increase in inflation will be short-lived or a persistent feature of the global recovery. This is why markets have been spooked – the likes of the Fed, the Bank of England and the European Central Bank could soon be forced to raise interest rates to combat inflationary pressures; and higher interest rates could hurt company valuations and limit businesses’ ability to raise finance.
On Wall Street, the Dow Jones Industrial Average ended trading on Thursday 2.2% down for the week so far, with the S&P 500 losing 2.8%. Technology and other “growth” stocks are generally viewed as having the most to lose in a rising interest-rate environment, and the likes of Apple, Facebook and Tesla have suffered to a greater degree over the past few days.
Losses were reversed to some extent on Thursday thanks to positive new unemployment data. These figures reminded investors that, although rising prices are an inevitable side-effect, a strong economic recovery from the worst slowdown on record is, on balance, a good thing.
The UK & Europe
In the UK, the FTSE 100 ended Thursday 2.3% down for the week, with prices hit by the same inflation fears as the rest of the world. On Monday, the government released its very limited “green list” of low-risk holiday destinations, much to the disappointment of travel firms and airlines. As it stands, anyone returning from popular locations such as Greece, France or Spain will still face a 10-day quarantine period upon their arrival back in Britain.
There was more positive economic news from the UK, with the first-quarter GDP fall not as steep as expected, and rises in industrial and manufacturing output recorded. House prices, meanwhile, are rising at their fastest rate in five years thanks to the ongoing stamp duty holiday.
In Frankfurt, the DAX index ended Thursday’s session down 1.3% for the week, while France’s CAC 40 lost 1.5%. Inflation is also ticking up in the eurozone, new figures show, and while industrial output too is rising, growth remains sluggish. Nonetheless, investor confidence across the European Union is at its highest level since early 2018 as the recovery takes hold.
Note: all market data contained within the article is sourced from Bloomberg unless stated otherwise, data as at 13/5/2021.