Nerves Frayed On Financial Markets As Inflation Still Proves Very Hot To Handle

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  • FTSE 100 ends down 1.1% after US inflation comes in higher
  • Nasdaq slides by 4%, while the S&P fell by 3%
  • Bitcoin plummets by more than 6%
  • The dollar strengthens against the Euro and sterling

Inflation Still Proving To Be Too Hot To Handle

“Nerves are frayed on financial markets amid worries that inflation is still proving very hot to handle for the US Federal Reserve. Investors have turned highly skittish again, retreating further away from risky assets, and sending stocks sliding on Wall Street.

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The tech heavy Nasdaq is down by more than 4%, the wider S& P 500 fell by 3%, and gains were erased on the FTSE 100, with the index falling by more than 1% by the close.

There had been high hopes that the price spiral in the US would show fresh signs of flattening, but those have been dashed with the latest CPI snapshot showing that consumer prices rose 8.3% year-on-year in August and were up 0.1% on the month despite hopes than the financial pain for consumers would be easing.

What’s spooked investors in particular is the 0.6% rise in core inflation, which strips out the effect of changes in food and energy prices. That’s led to real worries that inflation is becoming embedded in the US economy and realisation is dawning that the Fed’s job is not done and more aggressive tightening is ahead, with the foot firmly on the monetary brake pedal.

The markets are now pricing in an 80% chance of a 0.75% hike next week, with rates now expected to end 2021 above 4%. That is being reflected in the Fed Funds Futures market, which are contracts demonstrating the consensus of where the official rate will be at the time of the contracts expire.

Oil Prices Drop

Worries are ratcheting up about the effect this big monetary squeeze will have on the global economy, putting pressure on oil prices amid expectations of lower demand. Brent Crude has retreated to back to $92 a barrel but further falls are being stemmed by an OPEC report indicating that economics still remain resilient and that demand will still hold up through to the end of the year and in 2023.

The mighty dollar is strengthening again as investors race for a safe haven amid worries about the economic impact of a ratcheting up in rates. This threatens to pile more inflationary pressure onto economies which import commodities priced in dollars.

The Euro is heading back towards parity with the dollar and the pound has also retreated back to $1.157, reversing some of the gains of the last few days.

Bitcoin has dropped like a stone, as the cheap money era unwinds further with crypto assets still highly entwined with the fortunes of the equity markets.

It’s heading back towards the psychologically important $20,000 mark, while Ether also dropped by 5% despite all the hype surrounding the ’Merge’ this week – the big switch to the more environmentally friendly ‘proof of stake’ model.