FTSE 100 and Wall Street slump amid rising inflation fears

• Rising inflation fears send global markets tumbling on Tuesday
• UK travel shares fall sharply and London markets close lower following Chinese inflation data
• FTSE 100 recovering following the release of better-than-expected UK GDP data
• Pound Sterling (GBP) holds steady after UK GDP data for March beats expectations

Global markets faced a sharp sell-off in overnight trade on Tuesday after the publication of Chinese Consumer Price Index (CPI) data, which disappointed investors and gave way to rising inflation fears.

China’s inflation declined by 0.3% month-on-month in April against preliminary estimates of 1%, with an overall growth of 0.9% year-on-year.

However, the Producer Price Index (PPI) surged by 6.8% – the fastest pace since March 2017, against expectations for a 6.5% increase, adding to global inflation worries.

Separate data published on Tuesday also revealed that China’s population is growing at the slowest pace in decades, increasing pressure on the Chinese government to encourage couples to have children as the ageing population could create socio-economic challenges.

Data from China saw Hong Kong’s Hang Seng Index slide by 1.8% on Tuesday, while Japan’s Nikkei 225 closed nearly 2% lower.

Shanghai’s Composite Index also slipped in overnight trade but is recovering on Wednesday, currently up by 0.61% or 20.91 points at 3,462.75.

In the US, the Dow Jones dived by nearly 500 points or 1.4% to close at 34,269.16 – its most significant daily drop since February.

The tech-heavy Nasdaq index managed to reverse its fortunes during North American trading hours, closing 0.093% or 12.43 points lower at 13,389.43 on Tuesday.

European markets also closed lower amid growing fears that rising inflation could cause consumer prices to rise and trigger an interest rate hike.

FTSE 100 down by nearly 3% following China’s CPI release

London’s blue-chip FTSE 100 Index suffered its largest one-day fall since February on Tuesday despite confirmation that the UK will be going ahead with plans to ease the next round of coronavirus restrictions on May 17th.

After trading above 7,100 for the first time in over a year on Monday – buoyed by comments from Bank of England (BoE) officials – the FTSE 100 retreated below the 7,000 level yesterday to close at 6,947.99.

Travel stocks were among the top losers, with shares for British Airways parent company IAG plunging by more than 7% on the back of the UK government’s green list announcement.

Across the Channel, Germany’s DAX plunged by 2%, while France’s CAC fell by 2.1% to 6,267.39.

Cryptocurrencies also slumped alongside more traditional shares in the wake of China’s CPI release, with Bitcoin plunging by 5.4% and Ethereum declining by 3.9%.

AJ Bell Investment Director Russ Mould said: “The market just can’t shake the inflation fears which are clouding the recovery from Covid.”

However, Shore Financial Investment Director Ben Yearsley believes investors should only be worried if higher inflation persists over the long term. Mr Yearsley added: “the current scenario does not suggest that banks will increase interest rates.”

Although investors are fretting over inflation in countries worldwide, US inflation fears are the main focus of nervousness, primarily due to the country being the world’s leading economy.

Although the coronavirus situation in the country is improving, meaning that Americans should return to some semblance of normalcy soon, investors are concerned about the build-up of unplanned savings and how this could impact consumer prices.

Why are investors worried about inflation?

With COVID-19 vaccination programmes in full steam ahead and restrictions being lifted, investors expect a significant amount of savings accumulated during national coronavirus lockdowns to be spent, which could add to the pressure of inflation by driving prices higher.

Although central banks could steer inflation with policies, the likelihood of spending booms post-lockdown should not be underestimated following a year’s worth of pent-up demand and trillions in fiscal support.

Most central banks have set an inflation target of 2%, and while inflation in most advanced economies is below that level, there are fears that this will not remain the case.

Governments have spent billions during the pandemic to support incomes and prevent surges in unemployment, which has led to an increase in household savings over the last year.

In the US, the White House passed a USD 1.9TN (GBP 1.4TN) stimulus package, which included cheques worth USD 1,400 for millions of Americans, an extension on jobless benefits and school reopening funds.

As the money has come at a point when most people would be unable or unwilling to spend as they usually would, investors fear that when economies fully reopen, the increase in spending will drive prices higher and cause inflation to spiral.

US inflation already surpassed 2% in March, and investors are concerned that the Federal Reserve (Fed) will raise interest rates to try and curb increased spending.

So far, the Fed has attributed rising inflation to “transitory factors” and said there is no need to change policy as it expects the situation to cool in the medium to long term.

However, with two of the world’s largest economies displaying signs of inflationary pressures, investors aren’t convinced.

Commodity prices are also skyrocketing, and eventually, this will be reflected in the prices of goods.

Investors will be eyeing US inflation figures out today, and any indication of rising consumer prices could trigger further stock market volatility.

Inflation data could also be consequential for the US dollar (USD) and fuel further volatility in USD exchange rates.

Although USD volatility will also impact pound Sterling (GBP) exchange rates, the UK currency has been resilient in the face of the US market wobble, supported by better-than-expected growth figures for March.

UK GDP beats expectations as the economy grows in March

The British pound to US dollar (GBP/USD) exchange rate is holding steady above the USD 1.41 level in mid-week trade. Despite inflation woes, the latest publication of UK gross domestic product (GDP) figures has kept investors optimistic about Britain’s post-pandemic recovery prospects.

According to the Office for National Statistics (ONS), UK GDP jumped up by 2.1% in March, boosted by the reopening of schools and outdoor recreation facilities.

UK Chancellor Rishi Sunak hailed the news as a “promising sign” that the UK economy is on course to undergo a robust recovery in 2021 as the March gain helped stem the GDP contraction during the first three months of the year.

While the UK economy shrank by 1.5% in Q1 2021, the scale of the economic downturn is far lower than initial estimates of 4%. Furthermore, as more areas of the economy opened in April and May, economists forecast a solid rebound in Q2 this year.

The Bank of England (BoE) has already revised UK growth forecasts. It now expects UK output to expand by 7.25% in 2021 due to Britain’s progressive COVID vaccination programme and cautious unlocking of the economy.

Today’s data is also consistent with the positive outlook for the British pound (GBP), which is trading near one-month highs against the US dollar (USD) on Wednesday.

Meanwhile, the British pound to euro (GBP/EUR) currency pair has jumped 0.2% higher to EUR 1.165. Given that the political risks stemming from the Scottish election are fading and part four of UK Prime Minister Boris Johnson’s lockdown exit roadmap is set to get underway next week, GBP/EUR could extend gains over the coming days.