From Tokyo to San Francisco, investors are selling, selling and selling fast, as they fear the inflationary wave that is sinking portfolios will turn into a …tsunami.
Since Friday’s surprisingly high CPI (consumer price index) reading, in which inflation reached its highest level in 40 years in the world’s largest economy, global investors have been rushing for the exits, assuming that higher prices will plunge much of the developed world into recession as consumers and businesses everywhere begin to retreat.
BofA Securities warned on Friday that there is “nowhere for investors to hide” as inflation seeps into every corner of the economy. Those words were again hanging over the markets this morning. For the second straight session, investors are dumping bonds, unloading cryptocurrencies and also trimming their equity portfolios.
US futures are under fire, with Nasdaq futures down 2.3% this morning, implying a nearly 6% drop over two days.
At Europe, equities are moving into the red, following Asia’s example to the downside. The benchmark index Europe Stoxx 600 fell by 1% at the opening, as the euro collapsed and bond yields soared on concerns that central banks will be forced to raise interest rates more aggressively to control rising prices.
Overall, markets appear to be suffering from investor fears associated with inflation data.
The worst performance is found in the cryptocurrency space. Bitcoin and Ethereum’s Ether fell over the weekend as investors pulled out of all cryptos with inflation soaring. On Monday morning, Bitcoin fell below $25,000, a level not seen in 18 months.
The… ”carnage” in the markets is preparing investors for a volatile period ahead of the FOMC meeting on Wednesday. Wall Street now expects the Federal Reserve to raise interest rates by 50 basis points this week and at the next meeting – it will be the third 50 basis point increase in a row.
Goldman Sachs revised its forecast for rate hikes, predicting that the Fed will go ahead with three more 50 basis point hikes in the next three rate-setting meetings. Former US Treasury Secretary Lawrence Summer, who has been warning about rates for months, said investors could even see an increase of up to 75 basis points as the Fed tries to bring inflation under control, a view shared by economists at Deutsche Bank.
This kind of pessimism is fueling a dramatic sell-off. Yields on the 10-year government bond have shot up 15 basis points since Friday morning and the dollar has taken off against other world currencies. This morning, the Japanese yen hit a 24-year low against the dollar.
And this whole inflation story hardly looks like it can be abated, especially as new data is expected in the short term to prolong the concern.