Inflation fears spark another day of declines

Chinese factory costs have once again highlighted the risk of a sharp surge in inflation this year. While the risk of a bout of monetary tightening may have hurt tech yesterday, we are seeing more indiscriminate selling take hold today. 

• Inflation fears spark market sell-off 
• Chinese PPI highlight how commodity prices are raising input prices 
• Markets sell across the board follows yesterday’s tech focus 

Inflation fears have hurt market sentiment today, as European markets maintained the pessimistic tone established in the US yesterday. An overnight jump in Chinese PPI data highlighted how commodity prices are lifting factory costs, with traders worried that input costs will feed into consumer prices which could result in a more hawkish central bank approach. Despite Powell attempting to quell fears of an inflation-fuelled rate hike on numerous occasions, todays selling pressure highlights ongoing fears that a spike in prices could ultimately force their hand. Despite promises that they would willingly let inflation run beyond the 2% threshold for some time, there is undoubtably a limit to that tolerance which many fear could be tested this year.  

From a market perspective, the prospect of a tightening of monetary policy raises questions over just whether some of the loftier valuations are justified. The 2020 outperformance of growth and momentum stocks may have gone a little too far, and the prospect of a monetary squeeze tends to see the likes of the Nasdaq targeted over value names. Nonetheless, while yesterday’s US selloff was geared heavily towards those high P/E growth names, today has seen traders take on a more indiscriminate risk-off approach. In a turn of events, today has even seen commodities fall despite many seeing their gains as a reason to be fearful. With lumber going limit down in trading, there is a fear that a monetary tightening could perhaps dampen some of the demand for construction materials as we go forward. Nonetheless, with the US planning to embark of a wide array of infrastructure projects, and housing likely to continue booming, it is unlikely that we have seen the end of this commodity boom.