Stock indices are under pressure from inflation. Investors are hedging with gold

The US stock indexes recorded their most significant weekly percentage decline since January and fell sharply Friday after the May inflation report dashed hopes that price pressures may have peaked. Data released on Friday showed that US consumer inflation jumped to 8.6% y/y in May, the biggest gain since 1981. Gasoline prices hit a record high, and the cost of food rose sharply. The core Consumer Price Index (which excludes food and fuel prices) failed to fall below 6.0%. Rapid price pressures force consumers to change their spending habits, heightening recession fears. The University of Michigan's consumer sentiment index for June also hit a new record, falling to 50.2 from 58.1. This situation caused the dollar index to spike and stock indices to fall. At the closing of the stock exchange on Friday Dow Jones Index (US30) decreased by 2.73% (-4.96% for the week), S&P 500 (US500) fell by 2.91% (-5.66% for the week). The Technology Index NASDAQ (US100) lost 3.52% (-7.05% for the week). All three indices were down for the week.

Equity markets in Europe also declined on Friday. German DAX (DE30) decreased by 3.08% (-5.59% for the week), French CAC 40 (FR 40) lost 2.69% (-5.30% for the week), Spanish IBEX 35 (ES35) fell by 3.68% (-4.51% for the week), British FTSE 100 (UK100) was down by 2.12% (-2.86% for the week). The markets are under the pressure of the fears that inflation growth and an increase in interest rates will lead to recession not only in the United States but also in the Eurozone. On Friday, Spain published its annual inflation data showing an increase from 8.3% to 8.7%. German, French, and Italian inflation data will also be released this week, followed by an overall figure for the Eurozone at the end of the week.

Gold futures rose sharply on Friday after US inflation data. Under the classical scheme, investors started shifting assets into the "yellow" metal "if inflation goes up, buy gold." But it should be noted that this growth has no fundamental support because the US Federal Reserve pursues a tightening policy, which usually has a negative impact on precious metal prices. That's because gold is inversely correlated with US government bond yields, which tend to rise amid rising interest rates.

European countries bought a record amount of Russian palladium in March. Purchases took place against the backdrop of sanctions and logistical problems. MMC Norilsk Nickel is the world's largest supplier of palladium. In Germany, there is one of the company's main customers - BASF SE concern. Palladium is used to produce car catalysts. Russian palladium can be replaced by platinum, but this will require considerable investment in research institutes.

Oil prices dropped more than 2 dollars on Friday and continued to decline Monday as the outbreak of COVID-19 disease in Beijing stifled hopes for a rapid increase in fuel demand in China. At the same time, concerns about global inflation and sluggish economic growth further exacerbated the market decline. On Friday, Brent crude oil futures fell by 1.7% to $119.95 a barrel, while West Texas Intermediate (WTI) crude futures fell by 1.8% to $118.54 a barrel. China remains a significant downside risk in the near term. Still, most view the gradual normalization of Chinese demand as a strong positive for oil, as current demand is far from reflecting normal conditions.

Asian markets traded flat. Japan's Nikkei 225 (JP225) gained 1.00% for the week, Hong Kong's Hang Seng (HK50) added 2.46% for last week, and Australia's S&P/ASX 200 (AU200) decreased by 4.24% for the week. At the opening of trading on Monday, Asian stock indexes started declining amid risks from the US Consumer Price Index and China's fight against COVID. Beijing's most populous Chaoyang district announced three rounds of mass testing on Sunday to quell the COVID-19 outbreak. Beijing also postponed opening the city's schools, which had been scheduled for Monday. Shanghai, another Chinese metropolis, also faced tighter restrictions over the weekend, with many establishments suspending food services. The new lockdowns in Shanghai came just 12 days after the city emerged from a months-long lockdown in early June.

In the commodities market, futures on corn (+6.36%), cotton (+5.36%), wheat (+3.1%), soybeans (+2.96%), and natural gas (+2.72%) showed the biggest gains in by the end of the week. Futures on lumber (-10.80%), platinum (-4.37%), copper (-4.33%), palladium (-3.32%) and sugar (-2.28%) showed the biggest drops.

Main market quotes:

S&P 500 (F) (US500) 3,900.86 −116.96 (−2.91%)

Dow Jones (US30) 31,392.79 −880.00 (−2.73%)

DAX (DE40) 13,761.83 −436.97 (−3.08%)

FTSE 100 (UK100) 7,317.52 −158.69 (−2.12%)

USD Index 104.19 +0.97 (+0.94%)

• – UK GDP (q/q) at 09:00 (GMT+3);
• – UK Industrial Production (m/m) at 09:00 (GMT+3);
• – US FOMC Member Brainard Speaks at 21:00 (GMT+3).

by JustMarkets, 2022.06.13

This article reflects a personal opinion and should not be interpreted as an investment advice, and/or offer, and/or a persistent request for carrying out financial transactions, and/or a guarantee, and/or a forecast of future events.