Investors Shrug Off Inflation Fears

Published on: 16 Feb, 2018

It is clear that equity market sentiment is not negatively influenced by the news of inflation rise in the United States. Stock markets all over the world went up. These showed resilience to all concerns regarding the overheated US economy. The effects of 'stronger than anticipated' inflation data were only confined to bond markets. The turmoil exhibited during February's first week was not seen. Instead, both Asian and European stocks gathered robustness on Wall Street.

Initial fear concerning the index data of consumer prices was dissipated at the end of the day. The Standard & Poor 500 went up by about 1.3 percent. There were also hints of more gains which may be in the region of 0.7 percent. When it came to currencies, the dollar index dipped 0.3 percent to about 88.44. This is a two-week duration low. The yen scratched a new 15-month peak at ¥106.38 for every dollar. It was a 0.6 percent stronger on the session.

According to Citi's Johanna Chua, this indicates that investors are likely to be over-positioned for event risk. Their behavior was due to the fear that they may miss out on profits being made. They had waited until the stocks got sold off and bought when the prices were low. In a similar stance, the dollar surrendered its minor post-CPI bounce. The dollar index went back to its recent low. Such moves permitted the fixed income markets to take advantage and thus reprice all the Fed tightening expectations.

Weaker dollar trend continues to remain. Investors expect the central banks of states to catch up with the rate tightening cycle of the Federal Reserve. This happens even as inflation makes a comeback to the United States.

Sovereign bond markets are another universe altogether. The 10-year US Treasury yields came at four-year peaks, a rise of two basis points at about 2.92 percent. This happened as investors slashed their exposure to this debt. The bond markets began 2018 by trading at about 2.43 percent. Inflation figures in the United States published on February 14 showed that there was a 0.3 percent rise in “core” consumer prices in December. This figure kept the Y-O-Y rate at about 1.8 percent. The expectation was a dip to a maximum of 1.7 percent. These data added fuel to the speculation that rates could be increased by the US Federal Reserve much more than what is being anticipated.

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Danny Abramov

Email: danny@financialinsiders.com

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