Stocks And Bonds Drop, Inflation Fears Mount And Bitcoin Rallies

Stocks and bonds are falling as energy prices continue to build alarmingly around the world, adding to inflation concerns.

Stocks start the week in risk-off mode, while the sellers are out in force in the bond markets as yields rise – the US 10-year Treasury note yield is back at 1.6% on bets that central banks will have to start raising rates much sooner than they would have liked.

UK short-term government bonds are trading at their highest level since 2018. The two-year gilt is up 0.11% at  0.68% today.

Governor of the Bank of England Andrew Bailey in comments made at online conference yesterday (Sunday 17 October) made his boldest statement yet in rolling back from the transitory inflation posture.

In a start turnaround from that previous position, he said on Sunday that inflation pressures “will last longer and it will of course get into the annual numbers for longer as a consequence.”

After a weak end to last week the dollar Index (DXY) is trading higher today at 94.124, as Treasury yields firm.

BoE Bailey on inflation: “this is another signal, that we will have to act.”

Adding to other recent comments about the need to take action on inflation sooner rather than later, Bailey was forthright, explaining that the situation with energy prices meant “that raises for central banks the fear and concern of embedded expectations. That’s why we, at the Bank of England have signalled, and this is another signal, that we will have to act. But of course that action comes in our monetary policy meetings.”

The governor remarks follow a similarly strident tone from monetary police committee hawk Michael Saunders last week.

Traders are now expecting the Bank of England to hike rates to as much as 1% by August next year compared to 0.1% today.

However, there is now concerns about the risk that central bankers could make a serious mistake in policy, by either raising too quickly  or not raising enough in the short term, forcing them to take more drastic action later.

Adding to nervousness on inflation was the news from New Zealand that prices rises in the second quarter jumped from an annual rate of 3.3% to 4.9%, beating the 4.2% economists had been predicting.

Senior economist at New Zealand’s ASB Bank commenting on the data said: “We can now see annual CPI inflation exceeding 5% by the end of this year.”

Crude oil prices to continue to rally, with West Texas Intermediate trading at 82.66, its highest level since 2014 and Brent Crude near $86.

China GDP growth rate falls back

GDP data from China has added to the gloom, with inflation slowing to its weakest rate in a year at 4.9% in the third quarter. That compares to 7.9% in the second quarter to June. China is also struggling with sharply higher energy prices, particularly in the coal market from which as much as 70% of the country’s energy generation comes from.

Producer price inflation in China is running at 10.7% – the highest since 1995, fed by energy price inflation but also supply bottlenecks elsewhere in the economy that is causing other product price increases as well as hurting production because of shortages and disrupted supply chains. As of yesterday there were 95 vessels waiting in line to enter Shenzhen in a sign of the congestion affecting China and the world’s major ports.

El-Erian: Fed must end asset purchases, higher volatility ahead

In remarks made to Fox News on Sunday, respected commentator Mohamed El-Erian and chief economic adviser at Allianz and president of Queens’ College Cambridge thinks it’s time for investors to strap up for volatility ahead. “I worry a little bit that this wonderful world we’ve been living in of low volatility, everything going up, may come to a stop with higher volatility,” El-Erian, the chief economic adviser at Allianz SE and president of Queens’ College, Cambridge, said on “Fox News Sunday.”

He thinks the US Federal Reserve needs to pull back on continuing to juice financial markets. the Fed “should ease off the pedal-to-the-metal monetary stimulus,” says El-Erian.

Stocks and bonds riding a wave of liquidity – but waves tend to break

“If I were an investor, I would recognize that I’m riding a huge liquidity wave thanks to the Fed, but I would remember that waves tend to break at some point, so I would be very attentive,” he warned.

He warned that on prices rise we will see “another year at least of high and persistent inflation”.

“Things will get worse before they get better. So we’re going to have more shortages of goods. We’re going to have higher prices. Inflation will remain in the 4 to 5% level.”

Inflation to be less transitory, Bitcoin Rallies to $62,000

El-Erian’s thoughts on elevated inflation lasting longer than previously expected were echoed by Andrew Ticehurst, a strategist at Nomura Holdings. “The global theme is that higher inflation will likely be less transitory than earlier expected amid elevated commodity prices.”

The bright spots for investors were to be found in energy-focused equities, with stocks in oil and gas companies rising in Europe.

Less risk averse investors will also be following the progress of bitcoin which has been accelerating its recent rally as market participants believe a bitcoin futures ETF is likely to be approved by the US SEC today of tomorrow. Currently priced at $61,814 the leading crypto is closing in on its all time high of $64,800.