Global stocks fall after US consumer prices post their fastest gain in 13 years, while bitcoin drops to $31,900

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Global stocks edged lower on Wednesday after US consumer prices rose at their fastest monthly rate since 2008, raising fears the Federal Reserve may have to wind down some of the accommodative polices it’s had in place since the pandemic sooner than expected.

The Consumer Price Index reading rose 0.9% between May and June, higher than the consensus forecast for a rise of 0.5% according to a Bloomberg poll. This marks the fastest monthly gain in prices since a 1.0% increase in April 2008.

Futures on the Dow Jones, S&P 500, and Nasdaq fell 0.2%, suggesting a lower start to trading later in the day.

Prices have been rising faster than ever over the past several months as demand for goods and services exceeds supply. The latest reading showed consumer inflation rose by 5.4% compared with last year, above the 4.9% economists expected. This was also the strongest rise in 13 years.

While most global asset managers see inflation as a transitory affair, Deutsche Bank said forecasts are still creeping up for next year. That indicates economists are starting to price in longer lasting inflation, which would make it more difficult for the Fed to maintain its argument that rising price pressures will be transitory, Deutsche research strategist Jim Reid said.

“Either that, or the transitory definition will have to be revised to cover several quarters rather than just months,” he said.

Bitcoin fell 4% to around $31,945 as of 4:00 a.m. ET, bringing losses over the last three months to 35%. Bitcoin bulls have long argued it is a hedge against inflation, but the idea that it serves a purpose similar to gold seems to be dwindling, particularly in light of Tuesday’s consumer price data.

Elsewhere in Europe, prices in the UK too rose at their fastest rate in three years in June. The Consumer Price Index rose 2.5% in the year to June, from 2.1% in May, higher than economists’ expectations for a 2.2% increase.

The release of eurozone industrial production later on Wednesday could give an insight into the recovery in the region’s manufacturing, mining, and utilities sectors.

London’s FTSE 100 fell 0.3%, the Euro Stoxx 50 fell 0.2%, and Frankfurt’s DAX fell 0.2%.

Asian markets lost ground as investors digested US inflation data. Investors will be tuning into Fed Chair Jerome Powell’s semi-annual testimony to Congress on Wednesday for any clues as to whether the central bank will take more aggressive action to halt rising prices.

The Shanghai Composite fell 1%, Tokyo’s Nikkei fell 0.3%, and Hong Kong’s Hang Seng fell 0.5%.

Read More: These 5 stocks are ripe for a short squeeze after surging in popularity this past month, according to Fintel. 2 even have the meme-friendly appeal of AMC and GameStop.

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Global stocks waver near record highs with US inflation data in focus, as bitcoin rebounds from its 10% slump

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Global stocks steadied around their all-time highs on Wednesday after a further calming of inflation fears helped drive a major rally in sovereign bonds.

Futures on the Dow Jones, S&P 500, and Nasdaq were mostly in the green, suggesting a higher start to trading later in the day.

US indices have proven unwilling to stray from their current levels in the last few days, said Connor Campbell, a financial analyst at SpreadEx. “Perhaps investors are waiting until tomorrow’s inflation data is revealed,” he said.

Investors are awaiting the US consumer price index for May, due to be released Thursday, as they assess whether rising inflation may nudge the Federal Reserve into rolling back its ultra-easy monetary policy. According to Dow Jones, economists expect the figure to rise 4.7% year-on-year.

The yield on the 10-year US Treasury note fell to its lowest level in almost three months, by 2% to 1.52%, suggesting an increase in demand for bonds.

UBS said concerns that US GDP growth is close to a peak could help explain why equities have struggled to break out of their range in the past few months.

“While concerns about peak growth in the US may have taken some wind out of the market’s sails, we think investors should look at other offsetting tailwinds,” Mark Haefele, chief investment officer at UBS Global Wealth Management, said. “We expect the cyclical recovery momentum to persist in the second half of the year, albeit with some bouts of volatility.”

Read More: A veteran options trader breaks down 3 potential drivers of AMC’s 2,500% surge this year – and shares how long the retail-fueled rally might last

Bitcoin recovered from its previous day’s 10% slump by climbing 4% to $34,240. The digital asset was trading around $31,036 on Tuesday, partly prompted by US authorities’ ability to use a private key to retrieve some of the Colonial Pipeline ransom.

“It seems the FBI has used some other chicanery to obtain the private key other than cracking the bitcoin algorithm, to the relief of bitcoin evangelists and cybercriminals everywhere,” said Jeffrey Halley, a senior market analyst at OANDA. “That saw it pare much of yesterday’s losses.”

In the UK, the government is considering delaying the final lifting of its COVID-19 lockdown, initially scheduled for June 21. Cases in the country are now up 61% compared with last week, but still comparatively lower than in the winter months.

London’s FTSE 100 fell 0.5%, while the Euro Stoxx 50 and Frankfurt’s DAX were about flat.

Rising inflation in China – up from 0.9% in April to 1.3% in May – can shoulder some of the blame, having sparked a flurry of losses in the FTSE’s mining sector, Campbell said. UK miners Rio Tinto, Anglo American and Antofagasta were all down more than 1.2%.

Asian equities mostly traded slightly lower, but China’s slight increase in inflation and officials discussing coal price controls lifted markets on the mainland.

China’s Shanghai Composite rose 0.3%, Japan’s Nikkei fell 0.3%, and Hong Kong’s Hang Seng was about flat.

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2021 is a ‘turning point’ for inflation and stock investors should anticipate lower long-term returns as a result, Bank of America says

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  • Bank of America sees 2021 as a “turning point” for inflation that could weigh on stock returns.
  • An economic re-opening, $1.9 trillion stimulus, and vaccine rollout could push up inflation.
  • The firm is bullish on value stocks, cyclicals, commodities and real assets against this backdrop.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

The lower inflation of the last 40 years that sent interest rates down and stock market valuations higher has reached a turning point, according to Bank of America’s chief investment strategist Michael Hartnett.

“We believe we are at a secular turning point for both inflation & interest rates,” Hartnett and a team of Bofa strategists said in a note Thursday. “We believe 2020 likely marked a secular low point for inflation and interest rates due to a reversal of deflationary secular factors, fiscal excess, and an explosive cyclical reopening of the global economy creating excess demand for goods, services and labor.”

Now, as the economy reopens, vaccine rollout speeds up, and Washington’s $1.9 trillion stimulus bill is signed into law, the US could see a jump in inflation, according to the bank.

That jump could impact long-term equity returns. Stock investors who’ve seen a roughly 10% annual return from recent decades should expect that gain to go down to 3%-5% over the course of this decade, said BofA.

The firm recommends US stock investors focus on value stocks and cyclical stocks against this backdrop. Energy and Materials are the two sectors most levered to inflation, they added. Meanwhile, investors should “be nimble” around secular losers like oil, brick-and-mortar retail, and other areas that are likely to face continued disruption.

They noted it’s too early to price in if and when we’ll see a “disorderly jump in inflation and yields.” However, signs that typically precede inflation spikes are showing: 2021 has been the 4th worst start for the 30-year Treasury in the past 100 years, and the best start for oil since 1974.

“We believe the long-term asset allocation implications of 2020s inflation are bullish real assets, commodities, volatility, small cap, value & EAFE/EM stocks, and bearish bonds, US dollar, large cap growth,” said BofA.

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Fears of inflation are overblown, but it could still trigger near-term stock market volatility, UBS says

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UBS’s chief investment officer of global wealth management says investors should brace for a near-term spike in inflation, but concerns about a long-term rise are overblown.

“…While we think inflation may spike in the near term as pent-up demand meets constrained supply, we believe fears about a persistent rise are likely to prove overdone. However, such concerns could still trigger bouts of market volatility-S&P 500 futures were down 0.7% on Monday-and may test investors’ resolve,” said Mark Haefele in a Monday note to clients. 

The CIO recommends to investors to “keep going cyclical for the recovery,” against this volatile backdrop. Cyclical stocks are those that react positively when the broader economy improves. UBS favors small-and mid-cap stocks globally and US large-cap stocks in financials, energy, industrials, consumer discretionary, and healthcare.

With COVID-19 cases and hospitalizations declining in the US and vaccinations on pace for roughly 2 million shots a day, Haefele expects a wider opening of the US economy in the second quarter of 2021. Congress will likely pass a relief package north of $1.5 trillion before the end of March and the Fed will remain accommodative. Additionally, S&P 500 companies’  fourth quarter earnings exceeded expectations by almost 20%. This should be a positive environment for the cyclical rotation to continue, Haefele said. 

Investors concerned about an uptick in US inflation will be watching the Personal Consumption Expenditures (PCE) price index for January that will be released Friday. 

Meanwhile, UBS economists forecast that while the stimulus out of Washington may be larger than necessary, the package’s effect on inflation “likely will be small.”

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