Global stocks continue to rise despite high euro zone inflation

Global stocks were on track for a second day of record highs as traders shrugged off signs of an economic slowdown in China to focus on optimism about the US central bank persevering with its pandemic-era monetary stimulus.

The FTSE All World stock index gained 0.2 per cent after touching an all-time high on Monday. Europe’s Stoxx 600 equity gauge added 0.2 per cent, despite data showing eurozone inflation hit a 10-year high of 3 per cent in August, year on year.

The European Central Bank has pledged to keep borrowing costs negative, however, until consumer price rises remain “durably” above its 2 per cent target.

Records

London’s FTSE 100 traded flat and futures markets signalled Wall Street’s S&P 500 and Nasdaq Composite would build on records reached in the previous session.

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In Asia, Hong Kong’s Hang Seng index rose 1.3 per cent although the CSI 300 benchmark of mainland Chinese stocks lost 0.2 per cent after a survey of purchasing managers showed activity in the nation’s services sector had slowed sharply.

Equities were rallying in response to a speech by Federal Reserve governor Jay Powell at the central bankers' Jackson Hole symposium last week, where he spoke of the dangers of reducing the Fed's $120 billion (€102 billion) of monthly debt purchases too rapidly.

The bond-buying programme, designed to stimulate economic activity through the Covid-19 pandemic and continuing despite accelerating labour market improvement, has pushed down the income yields on US Treasuries and other debt instruments and made riskier assets such as equities more attractive.

Some analysts believe stock market valuations are now overly dependent on moves by the Fed, as opposed to companies’ earnings or the economic growth outlook.

“The Fed is kicking the can down the road as it relates to not only tapering its monetary accommodation but even in terms of providing markets with clear guidance on future policy,” said Mobeen Tahir, associate research director at exchange traded fund provider WisdomTree.

“This creates the risk of monetary policy itself becoming a cause of market volatility, with any slight hawkish tone from the central bank creating shocks.”

In China, the government’s purchasing managers’ index for the manufacturing sector produced a reading of 50.1 for August, below the previous month and just over the watermark of 50 that separates expansion from contraction.

Shares

The PMI for the nation’s non-manufacturing sectors dropped to 47.5, from 53.3 in July, which economists at Nomura attributed to the government’s “draconian measures” to control the spread of the Delta coronavirus variant, such as travel restrictions.

Chinese-listed technology shares dropped 1.5 per cent on Tuesday after the government ruled children should not play online games for more than three hours a week.

Elsewhere in markets, the yield on the benchmark 10-year US Treasury bond, which moves inversely to its price, was steady at 1.285 per cent, dropping from around 1.35 per cent since the day before Powell’s Jackson Hole speech. Germany’s 10-year Bund yield rose 0.02 percentage points to minus 0.418 per cent following the euro zone inflation data.

Brent crude, the global oil benchmark, fell 0.8 per cent to $73.86 a barrel. The dollar index, which measures the greenback against major currencies, fell 0.2 per cent.

The euro added 0.3 per cent against the dollar to $1.1827 while sterling gained 0.1 per cent to $1.3774. – Copyright The Financial Times Limited 2021