urging energy markets continue to put pressure on the outlook for inflation and higher interest rates after the price of Brent crude remained at a three-year high today.
The FTSE 100 index is set to open broadly unchanged but sentiment will be further tested this week when Wall Street’s banking giants release results for the third quarter.
The recent stock market jitters are highlighted in Deutsche Bank’s latest monthly sentiment survey, which shows that the majority of respondents think there’s another correction in the pipeline before the year is out.
The survey, which took place last week and covers 600 market professionals worldwide, found that 71% expect at least another 5% off equities at some point in 2021. Short term equity sentiment is as negative as it has been since the summer of 2020.
The biggest risks to the market are now higher bond yields and inflation, alongside weaker growth. Covid-19 is no longer seen as one of the three biggest threats.
Deutsche Bank also finds fairly strong consensus that stagflation of some kind is more likely than not, especially in the UK where over 50% expect it in the next 12 months.
Oil rally continues
Oil prices show few signs of budging from their multi-year highs, adding more inflationary pressures at the start of another testing week for global markets.
Brent crude is trading 1.6% higher at a new three-year high of $83.71 a barrel, with the US oil benchmark at a seven-year high of $80.31 a barrel after rising 5% last week on the switch away from soaring natural gas prices.
The inflationary outlook will be tested later this week, with producer price index data in the US and China. On Friday, there were more signs that the US labour market recovery appears to be running out of steam after the weakest non-farm payrolls figure this year.
Most economists had expected the September result to provide the final piece of the jigsaw for the US Federal Reserve to start the tapering of its $120 billion a month asset purchase programme, when it meets in a few weeks’ time.
Despite the weak figure, the impact of rising prices means there’s still huge pressure for policymakers in the US and the UK to consider early rate rises.
Michael Hewson, chief markets analyst at CMC Markets, said: “These concerns appear to be being articulated much more loudly in recent weeks, with the Bank of England becoming much more vocal in recent days.
In an interview with the Sunday Telegraph, external monetary policy committee member Michael Saunders said markets were right to start betting on faster rate rises, due to surging energy markets and labour shortages.
Hewson added: “He isn’t alone in thinking along these lines either after new chief economist Huw Pill voiced concerns over longer lasting inflation, something that the UK tends to be especially vulnerable to, while Bank of England governor Andrew Bailey also appears to be leaning in that direction as well.”
The FTSE 100 index is expected to open flat at 7095 in a week when confidence will also be tested by the start of Wall Street’s third quarter earnings season, with figures due from JP Morgan Chase and CItigroup among others.
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