The bearish mood in global stock markets deepened at the start of the trading week, marked by sell-offs on Wall Street and on the Asian indices ahead of US CPI data.
Inflation is a hot topic and one of the main drivers of sentiment as stock investors focus on the prospect of higher interest rates pressuring investment levels, and Forex traders price in new levels of uncertainty in the currency markets.
US inflation rate data for April is due out tomorrow, May 11. The annual result for March shocked the markets because it was an unexpected 40-year high on the back of elevated crude oil prices, but that has now been priced in and the focus has turned to the month-on-month inflation rate excluding energy and food prices.
The key question is whether the high inflation rate trend will accelerate or ease off. Expectations for April’s CPI results are a 0.4 percent rise in inflation (excluding energy and food) compared to 0.3 percent in March. There could be price action in the USD currency crosses depending on whether the actual results are below or above the expected figures.
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Impact of monetary tightening on stock markets
Monetary tightening is likely to slow down the rate of investment as loans become more expensive.
Until inflationary pressures show signs of easing, interest rates are likely to keep rising. Higher interest rates encourage investors to put their money into savings accounts, but make loan repayments more difficult, increasing the risks of defaults in the debt markets. With global debt at record levels after the pandemic, it’s not surprising that investors are nervous.
The shift in risk appetite was reflected in spot gold prices, which headed upwards as the USD lost ground after decimating the EUR over the last month. Safe-haven sentiment had switched from gold to the USD and that is unlikely to stop given the attraction of higher Treasury yields, but global recession fears are dominating animal spirits at the time of writing.
In short, currency traders and stock investors are hedging their risks and any good news in the US inflation report would likely calm animal spirits.
In other trading news, China and the EU release inflation rate updates on May 11 and the CNY and EUR may move on the results.
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.