Stocks drop as stagflation fear rise

After weakness in Asia overnight and disappointing UK GDP, European bourses are heading for a softer start to what is expected to be a busy week.

•         Chinese CPI & PPI beat forecasts bringing fears of stagflation
•         UK GDP falls to just 0.1%, raising questions over the BoE’s ability to hike rates further
•         Macron & Le Pen are through to the Presidential runoffs, EUR finds support from a Macron win

Concerns over stagflation in China, coupled with the ongoing lockdown in Shanghai, hit demand for riskier assets in Asia, sending stocks and the Aussie dollar lower.

Chinese consumer price inflation rose by a larger than expected 1.5% YoY in February, up from 0.8% in January, while producer price inflation jumped 8.3%, ahead of the 7.9% forecast. Rising inflation was evident even before the fallout of the Russian war sent energy and commodity prices surging higher. However, with slowing growth, fears over stagflation in the world’s second-largest economy pulled indices across Asia lower.

UK GDP

The FTSE and the pound were under pressure at the start of the week after data showed that economic growth in the UK almost stalled in February. GDP rose just 0.1% MoM, well below the 0.4% forecast and below the 0.8% recorded in January. Economic growth as good as stalled even before the fallout from the Ukraine war hit the economy and before the third interest rate hike from the BoE.

The data highlights the challenge that the BoE faces, with inflation set to continue rising in the coming months. Still, GDP is increasingly likely to fall into contractions forcing the central bank to choose between taming inflation or supporting growth.

This is in stark contrast with the US Federal Reserve, which is considering a 50 basis point rate hike in May and a more aggressive path to policy normalization.

GBP USD is testing support from the psychological level of 1.30 with a break below here opening the door to the 2022 low of 1.2980 hit on Friday.

French election

Elsewhere global shares are set to stumble as bond yields climb, with investors in a cautious mood ahead of a week packed with central bank meetings.

Over the weekend, Macron and nationalist Marine Le Pen qualified for the French Presidential run-offs on Sunday, 24th April. Le Pen had closed the gap in the polls with a Macron win at 54% to Le Pen’s 46%, a much tighter race than in 2017 when Macron won by 66% to 34%.

A Le Pen victory could hit the markets hard. While Le Pen is no longer pushing for an exit from the euro, she has rebranded herself to focus on economic issues. Her policies will center on substantial spending plans, contravening EU budget rules with an expected clash with Germany’s Olaf Scholz. A Le Pen victory could shock the eurozone, not dissimilar to the Brexit vote in June 2016.

The CAC is set to mildly underperform the DAX. However, the euro is showing resilience against a strong USD today, relieved that Macron is still in the lead.

The economic calendar is quiet today. Attention will shift to central bank meetings this week with the RBNZ, the BoC, and the ECB set to give interest rate decisions this week.