Stocks rise as stagflation fears and energy prices ease

October 7, 2021

By Herbert Lash and Marc Jones

NEW YORK/LONDON (Reuters) – World equity markets rebounded more than 1% on Thursday as hopes grew that Washington would resolve squabbling over the U.S. debt ceiling, while a global easing in energy prices tempered deepening fears of “stagflation”.

European bourses rallied off 2-1/2-month lows and Wall Street also jumped as steady crude oil and natural gas prices offered relief after a shock 4% drop in German industrial production highlighted supply chain disruptions.

German output of cars and auto parts slid 17.5% in August, due to supply shortages of intermediate products, providing a telling sign of the constraints posed by the combination of runaway inflation and moribund growth, or stagflation.

But the number of Americans filing new claims for jobless benefits fell the most in three months last week, suggesting the U.S. labor market recovery was regaining momentum after a recent slowdown as COVID-19 infections subside.

Stagflation fears are overdone as people confuse the direction of travel toward lower growth and higher inflation with the ultimate destination, said Bill Sterling, global strategist at GW&K Investment Management.

“It’s the pace of the journey versus the direction of travel,” he said. “The journey ultimately is to a global expansion that continues intact, which recently has had this stagflation tinge to it.”

MSCI’s all-country world index rose 1.53%, while the broad STOXX Europe 600 index advanced 1.69%.

On Wall Street, the Dow Jones Industrial Average rose 1.56%, the S&P 500 added 1.46% and the Nasdaq Composite moved up 1.64%.

Euro zone bond yields fell as energy prices declined, recovering from a sharp sell-off in debt markets a day earlier that had been driven by inflationary concerns.

Yields on the benchmark German 10-year bund slid 0.6 basis point to -0.188%.

U.S. Treasury yields rose as traders awaited U.S. employment data for September, to be released on Friday. Volatility at the shortest end of the curve eased in the wake of a potential plan to avoid a default on government debt this month.

Investors anticipate employment figures that are near consensus will lead the Federal Reserve at its November meeting to indicate when it begins tapering its massive stimulus program.

The benchmark 10-year U.S. Treasury yield was last up 3.8 basis points at 1.5525%.

Oil prices shook initial losses to turn positive as a possible release of emergency U.S. reserves and Russia’s offer to help Europe tide over an energy crisis did little to assuage concerns of tight supply heading into the winter season.

Brent crude rose $0.38 at $81.46 a barrel. U.S. crude was up $0.31 at $77.74 a barrel.

Natural gas prices are still up more than fivefold since the start of the year, and the huge increase over recent weeks has attracted attention from policymakers across the world.

Britain’s National Grid said the UK faced tight electricity supplies this winter while local media reported that Spain’s energy minister had summoned the top executives of its three main electricity firms.

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Overnight in Asia, MSCI’s broadest index of Asia-Pacific shares outside Japan closed up 1.8%, its biggest one-day rise since August.

Hong Kong led Asia’s gains with a 3% bounce off a year low. South Korea’s Kospi gained 1.8% and Japan’s Nikkei firmed 0.5% to snap eight days of losses.

There was still heavy bleeding in the Chinese property sector debt market, with Kaisa Group – China’s first default by a firm in 2015 – slumping as much as 8.2% and some of Greenland Holdings, which has built some of the world’s tallest residential towers, dropping to half their face value.

Graphic: China’s most indebted property companies https://ift.tt/3oIjLyX

The dollar was steady, not too far from 12-month highs hit last month against a basket of currencies and holding at a 14-month high against the euro.

The dollar index, which tracks the greenback versus a basket of six currencies, fell 0.099% to 94.125.

The euro was up 0.05% at $1.1562, while the Japanese yen traded up 0.05% at $111.4700.

Graphic: Global asset performance https://ift.tt/2XM5Ae6

Graphic: World FX rates https://ift.tt/3mzo5Ol

(Reporting by Herbert Lash, additional reporting by Marc Jones in London, Alun John in Hong Kong; Editing by Hugh Lawson, Chizu Nomiyama and Dan Grebler)

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