US inflation fears spark global equity sell-off

US inflation fears spark global equity sell-off

The recent sharp sell-off in global equity markets was not surprising given the state of the global economy, according to the head of asset management for the Asia Pacific region at Fidelity.

The sell-off in equities which began in the US has spread to Europe, with the FTSE 100 down 1.38 per cent this morning and now at its lowest level for six months. The MSCI UK Index was now down by 1.65 per cent over the past three months, while the MSCI World Index was up more than 4 per cent.

Fidelity's Paras Anand said: "The sharp sell-off in the US has likely caught no one by surprise. If anything, investors have been wondering how, in the face of tighter monetary policy, a contracting labour market and rising oil prices, the US has continued to be so resilient."

The US Federal Reserve has been tightening monetary policy by putting interest rates up for some time, but a combination of continued strong American economic data and higher oil prices, which also create inflation, meant the market had become more worried about the outlook for inflation, which has been expressed in the sell-off of US and other government bonds.

Such sentiments have been reinforced by the higher oil price and the ongoing trade dispute between the US and China, as both of those events would be expected to create more inflation, and necessitate more interest rate rises.

Edward Park, investment director at Brooks MacDonald, said the current bout of market volatility was sparked by comments on Wednesday 3 October from Fed chairman Jerome Powell which implied  US interest rates would need to rise by much more from the current level.

He said: "As the Fed gradually normalises policy and reduces the size of its balance sheet the liquidity environment is worsening and with that we should expect to see patches of heightened volatility."

A feature of the sell off in global equities this week was the sharp decline in the performance of US technology shares. The shares of Google were down over 4 per cent today, while Amazon was down more than 6 per cent.

As those stocks have been among the best performers in global markets in recent years, it is these which have fallen by the most.

Meanwhile, because falls in bond prices push yields up, the yield on the US 10-year bond has risen to more than 3 per cent.

This matters for equities because if an investor can get a return of 3 per cent from a low risk asset such as a government bond, then the return from equities is less attractive. Higher interest rates should also be bad for most equities because it increases the cost of debt for consumers and businesses, reducing the amount of spending power in the economy.

Fiona Cincotta, senior market analyst at City Index said: "The 10-year Treasury yield is used as a reference price for mortgages, car loans and other consumer debt and a spike in those yields is hitting industries like car makers and house builders that are exposed to consumer borrowing.