Investors Wary As Covid And Inflation Fears Stoke Worries About Growth

Published on
  • Caution on financial markets as Covid and inflation fears linger.
  • FTSE 100 opens lower, down 0.4%.
  • British shoppers tighten their belts amid cost-of-living crisis.
  • Investors nervous ahead of US inflation reading.
  • Miners on the back foot as fresh Covid restrictions imposed in China.
  • Oil dips as Joe Biden heads to Saudi Arabia amid calls for Gulf States to pump more.

Inflation Fears

“There is a wariness on financial markets, as concerns about fresh Covid outbreak add to worries about a global slowdown, with investors staying cautious ahead of a fresh temperature check on the US economy.

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Signs that British shoppers are dramatically tightening their belts show how the cost-of-living crisis has taken a swipe at their financial resilience. With lockdown savings rapidly evaporating, purses are being opened less frequently, and total sales are down 1% in June according to the British Retail Consortium. Discretionary purchases are falling fast, with non-food retail sales dropping by 3% in the three months to June. Faced with squeezed household budgets, items people want, rather than need are dropping off shopping lists.  Holiday purchases and a splurge for the Jubilee did provide some cheer, but with food inflation set to reach 15% this summer the more frugal trend that’s emerging is likely to continue. Amid expectations that homewear and fashion aisles will be quieter in big stores, retailers have come under pressure in early trade. Marks and Spencer fell by 2.1%, while Tesco and Sainsbury’s and Next were also lower.

The latest US inflation reading is out tomorrow and already the CPI number is expected to be hot but if it comes in above the expected 8.8% year on year, it’s likely to cause a fresh bout of nervousness. Another scorching snapshot is likely to pour concrete into the path laid out by the Federal Reserve for an aggressive path of rate hikes, and cement concerns that growth will be flattened and the economy could contract.

Shutdowns In China

With shutdowns in China gathering pace as infections rise, it’s adding to nervousness about the destructive nature of Covid in the world’s second largest economy. Casinos and other businesses in Macau have been closed for the second time since the pandemic began, while millions of residents in Xi’an, Lanzhou and Haikou are in partial lockdown. In Shanghai mass testing is ominously underway yet again, just weeks after the city-wide lockdown was lifted, raising worries about the potential for more supply chain snarl ups. Worries about demand for commodities in China have again put pressure on mining giants, with Anglo American falling 2.3% in early trade.

Amid concerns about the health of the global economy, the price of oil has dipped, with Brent crude trading around $105 a barrel. But supply concerns persist, with the sanctions squeeze limiting Russian oil purchases, and prices are still a third higher than at the start of the year. Although deteriorating growth in economies would be a downwards force on the oil price, fresh attempts to limit Russia’s financial power, by imposing a price cap on its crude exports, could distort markets further adding to volatility. Joe Biden’s trip to Saudi Arabia to reset ties with the Kingdom, comes amid pleas to Gulf States to pump more oil to bring stability to the oil markets. However higher oil prices have boosted Gulf economies, with Saudi Arabia’s GDP surging by 9.9% in the first quarter. So there is likely to still be reticence about turning on the taps too freely, particularly given the country is already believed to be operating near the limits of its capacity."

Article by Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown

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