Markets

Concerns about stagflation send European stocks and Wall Street futures lower.

European equities started the third quarter of the year lower, as concerns about economic stagflation and US monetary policy combined with surging energy prices and risks of a slowdown in China’s industrial and property sectors to prolong a downturn in global stock markets.

The regional Stoxx 600 index, which rallied to a record in early September before losing 3.4 per cent over the month, dropped 0.9 per cent in early trading. London’s FTSE 100 fell 0.7 per cent.

Futures markets signalled that Wall Street’s S&P 500, which ended September almost 5 per cent lower in its worst performance since the coronavirus-induced rout of March 2020, would lose 0.8 per cent in early New York dealings.

Anxiety over rising inflation and an oil price surge prompted by spiking natural gas prices have increased bets of the US central bank moving closer to its first pandemic-era rate increase.

In China, where the potential collapse of debt-laden homebuilder Evergrande has highlighted stresses in the economically important property sector, the Beijing government is also scrambling to secure energy supplies, intensifying fears of higher prices for the rest of the world. Chinese provinces have also ordered businesses to limit power usage.

“Government measures to reduce energy consumption are having a dampening impact on growth at the same time as the Chinese economy is facing the deleveraging spillover risk from the fallout from Evergrande,” Jefferies strategist Christopher Wood said.

The yield on the 10-year US Treasury bond fell 0.05 percentage points to 1.481 per cent as investors selling equities sought shelter in the low-risk asset, despite half of Fed officials last week forecasting an interest rate risk next year.

Fed chair Jay Powell has also signalled that the Fed will in November announce reductions of the central bank’s $120bn of monthly bond purchases that have boosted lending and spending throughout the pandemic.

Brent crude, the international oil benchmark, inched 0.2 per cent lower to $78.14 a barrel after touching $80 earlier this week for the first time in almost three years. The dollar index, which tracks the US currency against six others including the euro and sterling, was steady after touching a one-year high in the previous session.

“The idea of a tighter monetary environment going forward is what is driving equities at the moment” said Nitesh Shah, research director at ETF provider WisdomTree.

He added that stock market listed companies also faced “real pressure on their profit margins” from higher energy prices and shortages of crucial products such as semiconductors, while inflation and rate rises would make it “more difficult to pass higher costs on to consumers”.

In Asia, Tokyo’s Topix share index dropped 2.2 per cent. Markets in Hong Kong and mainland China were closed on Friday for a holiday.

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