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World stock markets are continuing to nose dive as fear of inflation – or rather, fear of rising US interest rates – batters investor confidence across the globe.
After a string of weak US economic data, Wall Street had been hoping that the interest rate hikes might be due to stop. But US Federal Reserve chief Ben Bernanke got the trading week off to a bad start by emphasising his concerns about inflation.
The Dow Jones Industrial Average plunged nearly 200 points on Monday, and the sell-off continued yesterday. The index is now hovering just above 11,000.
But never mind. The World Cup is bound to sort everything out. After all – just look at what it’s doing for UK retail sales…
In the UK, retail sales growth slowed sharply in May, but was still well ahead of expectations.
The British Retail Conortium Sales Monitor showed that like-for-like sales (sales excluding new stores) rose 3.6%. And it’s all down to a certain imminent sporting event.
Apparently there were “sales declines in most sectors”, with “shoppers wary of committing to larger housing-related purchases.”
But “food sales held up” – we all need to eat, after all – “and large TVs showed excellent gains ahead of the World Cup”. So should everyone run out and buy stocks in electrical retailers?
Perhaps not. The World Cup begins in a couple of days, so anyone who hasn’t got their flat-screen telly in by now is leaving it a bit late.
And if everyone’s replacing their TV with a state-of-the-art model at this end of the tournament, that means there’ll be less demand for TVs during the second half of the year. So retailers like Comet and Dixons may well find that sales start creeping back down in the third quarter.
Last week we published a piece from Charles Stanley’s Jeremy Batstone on why the World Cup will only provide a short-term boost for retailers. He also has some wise words to those tempted to jump into retail stocks – you can read them here: Why the World Cup won’t save retailers
Getting back to the current carnage in global markets – we published a piece yesterday from investment managers RH Asset Management (RHAM) detailing four warning signs that they believe investors should watch out for in the current markets.
One bad omen is if the Dow Jones closes below 11,000. “That number now represents a key signal for future weakness of the US stock market.”
As we mentioned above, the Dow closed last night at 11,002, and at one point during the session fell below 10,950. And another of RHAM’s bear signals was actually breached at the start of this week.
If you missed the piece, and want to find out what the other three warning signs are – and we think you should – then take a look here: Four bear market warning signs to watch out for
But surely if stock markets are falling and the US economy is weakening, there’s no need to raise interest rates?
Unfortunately, that’s not necessarily the case. As Edward Chancellor points out on Breakingviews.com, ‘core inflation has averaged over 3% in recent months.’ And when people start to believe that prices will keep rising, it takes more than ‘small incremental rate hikes’ to convince them otherwise.
And the Fed realises this. Mr Bernanke acknowledged that the US economy is “experiencing a real slowdown”, according to CBS Marketwatch. But comments from one of his colleagues confirmed that the US central bank is far from convinced that this will prevent a nasty outbreak of inflation.
St Louis Federal Reserve president William Poole told the Wall Street Journal: “If inflation turns out to exceed our expectations, our target range, I do not believe we can count on a slowing economy to bring inflation down, by itself, quickly.”
As one Paul Nolte, of US investment group Hinsdale Associates put it: “Bernanke has thrown a huge monkey wrench into the works…there may be a lot more rate hikes than we initially thought.”
So forget about penalty shoot-outs and Wayne Rooney’s big toe. It looks like the real nail-biting drama this summer will be played out on the world stock markets.
Turning to the wider markets…
The FTSE 100 ended down 92 points at 5,669. Miners were among the main losers as base metal prices continued to fall. Xstrata fell 6% to £19.39. But the biggest loser was fund manager Amvescap, which slid 6% to 486.5p in sympathy with the downturn in global equity markets. For a full market report, see: London market close
Over in continental Europe, the Paris Cac 40 fell 118 points to 4,797, while the German Dax fell 118 to close at 5,502.
Across the Atlantic, stocks dived further, as the impact of Federal Reserve chief Ben Bernanke’s inflation comments continued to haunt Wall Street. The Dow Jones Industrial Average fell 47 points to 11,002, while the S&P 500 lost 1 point to 1,264. The tech-heavy Nasdaq fell 6 to 2,162.
The fear over a US slowdown continued to hurt Asian markets too. The Nikkei 225 fell 288 points to 15,096, its lowest close since November. Exporters such as electronics giant Sony and car maker Honda were once again among the main fallers on fears that US consumers spending will collapse.
This morning, oil was easing back in New York, trading at around $72.20 a barrel. Brent crude was also lower, trading at around $69.10.
Meanwhile, spot gold was lower, trading at around $624 an ounce as the dollar strengthened, while silver traded at around $11.74 an ounce.
And here in the UK, closed life insurance fund group Resolution has agreed to pay £3.6bn for Abbey’s life insurance units, which include Scottish Provident and Abbey National Life. The units manage about £29bn between them.
And our two recommended articles for today…
How high would gold rise under a new gold standard?
– How high would the gold price be if all existing notes and coins in the world were replaced with the yellow metal? Gold commentator Paul van Eeden’s calculations suggest that the gold price has some way to run. In fact, he doesn’t even believe we are in a real gold bull market yet. To find out why, see: How high would gold rise under a new gold standard?
Where should you put your money as the carry trade ends?
– The carry trade has been a fundamental driver of asset prices in recent years – but now its time is ending. So what is the worst that could happen? Whiskey and Gunpowder’s Mike ‘Mish’ Shedlock presents six different conditions that could inflict the maximum damage on world markets – and worryingly, all of them seem likely to happen in the coming months. To find out what they are, see: Where should you put your money as the carry trade ends?