Despite a week of doom and gloom in the stock markets, futures in the United States are still trading lower. Since February, the S&P 500 has been on its longest losing streak. On Friday, markets were under pressure following the release of higher producer price data, which confirmed what investors already suspected: rising inflation and a slowing economic recovery.
Last week, the Dow Jones Industrial Average dropped 2.15%, and the S&P 500 index fell 1.69%. The Nasdaq, the tech-savvy index, dipped 1.61%. The S&P 500 and Dow declined five days in a row, while the Nasdaq has lost three days in a row.
Bears were on a rampage in Friday’s session after data depicted that producer prices surged 0.7%, on a month-on-month basis, and 8.3%, on a year over year basis, in August. Investors should note that the consumer price data is scheduled to be released on Tuesday. This data would suggest how much of the rise in production costs are being transferred to consumers. It is expected that consumer prices will have risen 5.3%, on a year-on-year basis, in August.
The growth in inflation should come as a surprise to the Fed because inflation does not appear to be under control, despite its mantra that inflation is temporary and will eventually subside. The likely culprits behind the uptick in inflation are inventory shortages, supply chain bottlenecks, and higher shipping rates. The Fed is keeping a close eye on two key indicators: the labour market’s health and the trend in inflation. Both metrics have shown weakness so far, and this situation may prompt the hawks to seize control in the short term.
Having said that, investors should keep in mind that stock markets have posted double-digit growth on a percentage basis, but the rising repercussions caused by the coronavirus could likely dent economic growth. The continuous rise in covid cases, despite the vaccination rollout, has curbed confidence among Americans and has contributed to supply-side inflationary pressures. Furthermore, central banks around the globe are coming closer to withdrawing their pandemic era stimulus, which would add to the already existing uncertainty in the financial markets.
Bitcoin gained popularity in recent days, with El Salvador recognising it as its legal tender and Ukraine legalising the digital asset. Cryptocurrencies are increasingly being included in investor portfolios as a means of enhancing diversification and earning higher returns.
Pantera Capital, an investment management firm, recently announced the creation of a new crypto fund with plans to invest $600 million in the blockchain space. The company manages assets worth $5 billion and has had exposure to the blockchain space since 2013. Officials at the company are working to reduce volatility for investors by entering them into long-term contracts, removing the hassle of being affected by daily price fluctuations.
Oil prices have been on the rise because of supply-side constraints. Companies have still not been able to resume output which was paused as a result of Hurricane Ida. Nearly 1.4 million barrels of crude oil production have remained halted since the end of August. Crude oil inventories have also declined to their lowest level since September 2019. With oil output still lagging behind demand, oil prices are likely to remain under pressure over the next few days.
Another factor driving up crude oil prices is optimism about improved trade relations between China and the United States. Markets leapt following word of a phone call between Xi Jinping, President of the People’s Republic of China, and President Biden.
Moving forward, investors should examine the International Energy Agency’s and OPEC’s revised demand forecasts for 2022. They should keep an eye on whether demand will recover to pre-pandemic levels or will be dragged down by the coronavirus situation.
Gold prices surged after the U.S. and China initiated a dialogue in which they discussed key strategic matters. The three main agenda items were the coronavirus situation, the economic environment, and climate change. Following the call, the dollar, compared to the Chinese Yuan, depreciated 0.35%, settling near its lowest level in two months. However, the dollar gained support from Friday’s producer price index, which came above expectations, indicating that rising inflation is likely to continue for a while and may prompt a more hawkish Fed.
Investors should keep an eye on China’s big tech stocks because, according to reports, Beijing is looking to break up Ant Group’s Alipay and create an independent application for its loan segment. Furthermore, geopolitical tensions are rising, with the Biden administration discussing an investigation into Chinese subsidies. As of 11:07 p.m. EST, the Nikkei slumped 0.29%, while the Shanghai Composite Index dropped 0.10%. The ASX 200 index rose 0.38%, and Seoul’s Kospi declined 0.13%. The Hang Seng index, in Hong Kong, dipped 1.83%.