Tuesday, 5 July, 2022

Markets dive on inflation woes as dollar spikes against yen, rupee

HONG KONG: Markets tumbled in Asia and Europe on Monday to extend a global rout while the dollar soared after a forecast-beating US inflation print ramped up bets on a more aggressive campaign of Federal Reserve interest rate hikes.

Fresh Covid outbreaks in Shanghai and Beijing have also seen authorities reimpose containment measures soon after lifting them, leading to fears about the world's number two economy, reports AFP.

The possibility of more restrictions in China's biggest cities weighed on oil prices, with concerns about a possible US recession and the stronger dollar adding to downward pressure on the black gold.

Investors were left surprised Friday when data showed US inflation jumped 8.6 percent in May, the fastest pace since December 1981, as the Ukraine war and China's lockdowns pushed up energy and food prices.

The reading has led to fervent speculation that the Fed will now be contemplating a 75 basis point lift in interest rates at some point, though it is still expected to stick to a flagged half-point hike when it meets this week.

With the central bank forced to be more aggressive, there is a concern that the US economy could be sent into recession next year.

"For the last few weeks, there has been a cautious calm in markets -- rates not pricing anything unforeseen, and equities able to make small gains," said SPI Asset Management's Stephen Innes.

"But the strength of (US consumer prices) completely upended that apple cart.

"The market is now thinking much more about the Fed driving rates sharply higher to get on top of inflation and then having to cut back as growth drops."

And Bank of Singapore chief economist Mansoor Mohi-uddin added that officials would likely lift borrowing costs 50 basis points for the next four meetings and eventually push the overall rate to 4.0 percent in 2023.

Wall Street's three main indexes tanked, with the Nasdaq taking the heaviest blow as tech firms -- which are susceptible to higher rates -- were battered, while European markets were also hammered.

Asia followed suit, with Hong Kong, Tokyo, Mumbai, Jakarta, Taipei, Wellington, Shanghai, Singapore, Manila and Bangkok all taking a beating.

And Europe joined the retreat with London losing more than one percent as data showed the UK economy shrank for the second month in a row in April. Frankfurt and Paris were also deep in the red during morning trade.

Goldman Sachs analysts said in a note: "At some point financial conditions will tighten enough and/or growth will weaken enough such that the Fed can pause from hiking.