Lately, major markets across the globe have been hit by a barrage of sell down on stocks and bonds due to fears of inflation fuelling a potential hike in interest rates.
The panic begins in the United States and has now spread to the United Kingdom, partly rubbing off on the European markets.
The US April 2021 Consumer Price Index (CPI), which measures the rate at which prices of items move within a particular period is put at 4.2 percent and deemed the fastest in more than 12 years due mainly to the increase in energy prices, cutting across the price of gasoline, which has risen by 49.6 percent and fossil fuel which is up by 37.3 percent.
Other major items prices that have been pacing inflation in the US include the rising price of copper now at a high of over 35 percent, due to demand by electric vehicles batteries manufacturers as well as lumber prices that are fast surging past 124 percent.
In the UK, the Consumer Price Index and owner occupiers’ housing cost (CPIH) for March 2021 is put at 1 percent. The Office for National Statistics attribute the largest contributions to transport costs, motor fuels and clothing prices.
Perhaps a more disturbing factor is the likely result of the base effect of the two emergency interest rate cuts by the Bank of England (BOE) in March 2020. Interest rate is the determinant figure at which a Central Bank lends money to commercial banks and a policy measure used to tame inflation. The BOE trimmed the interest rate first from 0.75 percent to 0.25 percent in March 2020 and further slashed the monetary parameter to 0.1 percent. The objective at the time aims to temporarily mitigate the impacts of the pandemic on the wider economy.
The UK April 2021 inflation data is due on Monday May 19, 2021 and investors are already jittery over concerns that the BOE will hike interest rate, afterwards, in a bid to mitigate the rising inflation trend, a similar concern shared among US’ analysts community.
The reaction from traders and investors led to an early sell-off on the Down Jones Industrial Average, Nasdaq index and S&P 500 before a recovery at the close of Thursday’s trading session.
The FTSE 100 index in the UK however failed to recovery from the mid-day decline of 1.8 percent. The indices closed 2 percent down on Thursday.
A few investors are of the opinion that because the UK had a third national lockdown at the start of the year and is still going through a phased re-opening until June 2021, the BOE Monetary Policy Committee may not be inclined to raise the interest rate at this time. It is on this note that such category of investors and analysts are cheery-picking on stocks with low valuations in the market. While there was load shedding on oil producing companies, the mining names and food producers, specialty chemicals, Elementis and logistics group, DX marked up 1.7 percent and 4 percent gains, apiece.