Markets tumble on new fears of inflat
Markets tumble on new fears of inflation
By Carter Dougherty. Copyright by The International Herald Tribune
THURSDAY, MAY 18, 2006
FRANKFURT Renewed fears that inflation may be spiking after a long period of stable prices sent global financial markets tumbling on Wednesday as an unsteady day in Europe unraveled into major losses in the United States.
In both the United States and Europe, data released on Wednesday suggested that high oil prices were starting to affect the prices of a wide variety of goods, not simply energy-intensive industries - an unnerving prospect for investors who have long held a sanguine view of future inflation.
The bad news followed a broad sell-off that has now stretched over much of the past week in equity, commodity and currency markets across the globe, amid what many investors described as a psychologically touchy moment with much of the excess liquidity that was sloshing around global financial markets now flowing into safer investments.
It is "perhaps not Armageddon, but market conditions are looking decidedly uncomfortable, having taken their lead from a panic-stricken 'street of dreams,'" David Buik of Cantor Index told Agence France-Presse.
Hints that inflation will soon leap are raising the prospect that the world's central banks will have to tighten credit conditions so that slower economic activity brakes inflation, instead of continuing their present course of raising borrowing costs to levels which neither spur nor hinder growth.
"The prospect that central banks will have to actually cool things off is a very frightening prospect," said David Bowers, chief global investment strategist at Merrill Lynch in London. "There is a macroeconomic vulnerability for stocks here that there has not been before."
Just a week ago, speculation was rife that the Dow Jones industrial average would soon breach the psychologically significant 12,000-point level. In late trading in New York, the Dow plunged 186 points, falling so rapidly after the government reported a rise in April consumer prices that trading curbs were triggered. The Standard & Poor's 500-stock index fell 1.3 percent and the Nasdaq fell 1 percent.
A broad index of European shares, the Dow Jones Stoxx 600 index, slumped 2.8 percent to 320.08, its steepest slide in three years. That index has fallen nearly 7 percent since reaching the highest level in five years earlier this month on fears that higher borrowing costs across the globe would dent growth and hurt corporate earnings.
In London, FTSE 100 slumped 2.9 percent to 5,675.5 points, its biggest decline in more than three years. The DAX in Germany was one of the hardest hit of Europe's national indexes, falling 3.4 percent, while the CAC 40 lost 3.2 percent.
Shares in Asia, where trading closed before the publication of the U.S. inflation report, snapped a near week-long losing streak as bargain hunters bought stocks that had fallen to eight-week lows. Markets there, which have slumped recently in sympathy with a decline in U.S. markets, have also been pressured by uncertainty about inflation and the future path of interest rates.
Meanwhile, commodities prices slumped across the board, as the dollar and bonds also declined.
In Europe, newly released data showed that inflation in the 12-nation euro zone edged upward to an annual rate of 2.4 percent in April from 2.2 percent the previous month. More worryingly from the perspective of traders, the core inflation rate that excludes volatile energy and food prices also ticked upward, to 1.5 percent from 1.3 percent the month before.
Across the Atlantic, much the same picture emerged later in the day as the U.S. Labor Department reported that consumer prices rose 0.6 percent in April, in large part because of rising gasoline prices. Core inflation, which strips out energy and food prices, also registered a 0.3 percent increase, higher that most economists had forecast.
High energy and commodity prices feed through to higher inflation for other goods when companies pass costs on to customers - something that a slow economic recovery in Europe has previously made impossible. But the current upswing is now revealing that some companies can now do just that.
For example, Valeo, a French auto parts maker, has struggled with high costs for aluminum, copper and other raw materials, but this year found its customers willing to pay higher prices.
"In 2005 our customers systematically refused to negotiate," the Valeo chief executive, Thierry Morin, told Bloomberg News. "Now I think a door is opening."
The European Central Bank and the U.S. Federal Reserve have now reached a delicate phase in which they will come under intense pressure to persuade financial markets in the coming months that they will contain inflation.
For both banks, a credible demonstration of their resolve could alone push back inflationary expectations for the future - but if they are not convincing, it raises the likelihood of sharp interest rate increases later on.
"We're looking at turning point jitters right now," said Rob Carnell, an economist with ING Barings in London. "The central bankers could get it right or they could get wrong."
The ECB has signaled that it will raise its benchmark interest rate by a quarter percentage point in June to 2.75 percent, and has hinted at further increases later in the year, though the pace and magnitude will depend on economic developments. Likewise, the Fed, nearing the end of a 2-year cycle of tightening rates, said last week it would monitor incoming data after raising its key rate to 5 percent.
But the central bankers' focus on new information, whether about inflation or growth, has injected a new element of uncertainty into financial markets, which over much of the past two years had adjusted to an ECB that largest stood pat, and a Fed that slowly raised rates in the United States.
"With so many central banks so data-driven, it increases the volatility all around," said Tony Norfield, a currency specialist with ABN AMRO in London.
These market jitters have produced a bitter paradox for equity markets.
Even though European companies are staging a highly profitable run after a recession and a limping economic recovery in through much of 2005, traders are looking toward the future vexed by a new uncertainty caused by inflation.
By Carter Dougherty. Copyright by The International Herald Tribune
THURSDAY, MAY 18, 2006
FRANKFURT Renewed fears that inflation may be spiking after a long period of stable prices sent global financial markets tumbling on Wednesday as an unsteady day in Europe unraveled into major losses in the United States.
In both the United States and Europe, data released on Wednesday suggested that high oil prices were starting to affect the prices of a wide variety of goods, not simply energy-intensive industries - an unnerving prospect for investors who have long held a sanguine view of future inflation.
The bad news followed a broad sell-off that has now stretched over much of the past week in equity, commodity and currency markets across the globe, amid what many investors described as a psychologically touchy moment with much of the excess liquidity that was sloshing around global financial markets now flowing into safer investments.
It is "perhaps not Armageddon, but market conditions are looking decidedly uncomfortable, having taken their lead from a panic-stricken 'street of dreams,'" David Buik of Cantor Index told Agence France-Presse.
Hints that inflation will soon leap are raising the prospect that the world's central banks will have to tighten credit conditions so that slower economic activity brakes inflation, instead of continuing their present course of raising borrowing costs to levels which neither spur nor hinder growth.
"The prospect that central banks will have to actually cool things off is a very frightening prospect," said David Bowers, chief global investment strategist at Merrill Lynch in London. "There is a macroeconomic vulnerability for stocks here that there has not been before."
Just a week ago, speculation was rife that the Dow Jones industrial average would soon breach the psychologically significant 12,000-point level. In late trading in New York, the Dow plunged 186 points, falling so rapidly after the government reported a rise in April consumer prices that trading curbs were triggered. The Standard & Poor's 500-stock index fell 1.3 percent and the Nasdaq fell 1 percent.
A broad index of European shares, the Dow Jones Stoxx 600 index, slumped 2.8 percent to 320.08, its steepest slide in three years. That index has fallen nearly 7 percent since reaching the highest level in five years earlier this month on fears that higher borrowing costs across the globe would dent growth and hurt corporate earnings.
In London, FTSE 100 slumped 2.9 percent to 5,675.5 points, its biggest decline in more than three years. The DAX in Germany was one of the hardest hit of Europe's national indexes, falling 3.4 percent, while the CAC 40 lost 3.2 percent.
Shares in Asia, where trading closed before the publication of the U.S. inflation report, snapped a near week-long losing streak as bargain hunters bought stocks that had fallen to eight-week lows. Markets there, which have slumped recently in sympathy with a decline in U.S. markets, have also been pressured by uncertainty about inflation and the future path of interest rates.
Meanwhile, commodities prices slumped across the board, as the dollar and bonds also declined.
In Europe, newly released data showed that inflation in the 12-nation euro zone edged upward to an annual rate of 2.4 percent in April from 2.2 percent the previous month. More worryingly from the perspective of traders, the core inflation rate that excludes volatile energy and food prices also ticked upward, to 1.5 percent from 1.3 percent the month before.
Across the Atlantic, much the same picture emerged later in the day as the U.S. Labor Department reported that consumer prices rose 0.6 percent in April, in large part because of rising gasoline prices. Core inflation, which strips out energy and food prices, also registered a 0.3 percent increase, higher that most economists had forecast.
High energy and commodity prices feed through to higher inflation for other goods when companies pass costs on to customers - something that a slow economic recovery in Europe has previously made impossible. But the current upswing is now revealing that some companies can now do just that.
For example, Valeo, a French auto parts maker, has struggled with high costs for aluminum, copper and other raw materials, but this year found its customers willing to pay higher prices.
"In 2005 our customers systematically refused to negotiate," the Valeo chief executive, Thierry Morin, told Bloomberg News. "Now I think a door is opening."
The European Central Bank and the U.S. Federal Reserve have now reached a delicate phase in which they will come under intense pressure to persuade financial markets in the coming months that they will contain inflation.
For both banks, a credible demonstration of their resolve could alone push back inflationary expectations for the future - but if they are not convincing, it raises the likelihood of sharp interest rate increases later on.
"We're looking at turning point jitters right now," said Rob Carnell, an economist with ING Barings in London. "The central bankers could get it right or they could get wrong."
The ECB has signaled that it will raise its benchmark interest rate by a quarter percentage point in June to 2.75 percent, and has hinted at further increases later in the year, though the pace and magnitude will depend on economic developments. Likewise, the Fed, nearing the end of a 2-year cycle of tightening rates, said last week it would monitor incoming data after raising its key rate to 5 percent.
But the central bankers' focus on new information, whether about inflation or growth, has injected a new element of uncertainty into financial markets, which over much of the past two years had adjusted to an ECB that largest stood pat, and a Fed that slowly raised rates in the United States.
"With so many central banks so data-driven, it increases the volatility all around," said Tony Norfield, a currency specialist with ABN AMRO in London.
These market jitters have produced a bitter paradox for equity markets.
Even though European companies are staging a highly profitable run after a recession and a limping economic recovery in through much of 2005, traders are looking toward the future vexed by a new uncertainty caused by inflation.
posted by Carlos T Mock at 9:31 AM
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