Inflation concerns & falling commodity prices hit European stocks

European bourses are a sea of red following on from a deep selloff on Wall Street. US inflation jumping to its highest level in 13 years has spooked the market, whilst a sell-off in commodities is giving the bears more room to run.

Inflation fears have been stalking the market all week and are showing few signs of easing. Whilst some inflation is good for companies and the market, the latest US consumer price data points to the balance moving too far in one direction. US CPI jumped to 4.2% in April, the highest level since 2008. The data confirmed investors’ fears of overheating and prompted bets that the Fed could move on rates earlier.

The prospect of tighter monetary policy boosted the US dollar, which has acted as a drag on commodities. Base metals, which have surged in recent weeks are trading lower, pulling down the heavyweight miners. Falling oil prices are dragging on the oil majors.

The economic calendar in the Eurozone is quiet today, leaving investors to look ahead to US factory gate inflation and US jobless claims.

US futures are pointing to further losses after the bloodshed in the previous session. Wall Street’s main indices closed between 2% – 2.6% lower with the tech-heavy Nasdaq taking the hardest hit. With investors positioning for an earlier move from the Fed, growth tech stocks are looking increasingly unattractive.

Given the large jump in consumer inflation the markets will be more focused than usual on the US producer price index to further gauge the Fed’s next move. Equity investors are paying little heed to what the Fed is saying right now. A blowout number for PPI could see the selloff take another leg lower.

FX – USD extends gains post CPI

The US dollar is heading higher after inflation data fueled expectations of an earlier move by the Fed. The US dollar had been largely ignoring the inflation fears that had been playing out in the equity markets at the start of the week. However, the CPI release put the writing on the wall. The benchmark US treasury yield hit a 5 week high rising to 1.70% overnight, before easing slightly.

Despite inflation rising to 4.2%, Fed speakers have been keen to emphasise that they still only see this rise in inflation as temporary and this could prevent the greenback from rising much further.

Federal Reserve member James Bullard is due to speak later. Just on Tuesday he acknowledged progress in the US economy’s economic recovery but insisted it was still too soon to start easing back on support. It will be interesting to see whether he has changed his tune following the inflation report when he speaks later. There is a good chance he won’t have, but whether the market will be prepared to take him at his word remains to be seen.

The pound is flirting with weekly lows on the back of the stronger dollar and ongoing jitters surrounding the Northern Ireland Brexit issue. Yesterday’s upbeat GDP data ended up having little impact on sterling, suggesting that much of the good news was already priced in.

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