Has this been the peak in inflation?
US inflation data was released on Thursday. It was already expected in advance that the values would decrease in comparison. And indeed, inflation fell, and more than expected.
The stock markets worldwide received this information with great enthusiasm, the Nasdaq even closed with +7% on Thursday. Now, one has to be very careful with such extraordinary positive days, because they usually occur in bear markets and not in stable bull markets. Nonetheless, in the event of a sustained turnaround on the inflationary side, there may actually be grounds for optimism.
Since November 2021, global stock markets have been falling from lows to lows and mid- and small-cap stock indices in particular have been hit even harder. For example, the MDAX lost a good 40% from its previous high. The fact that small to medium-sized companies are more affected by rising interest rates due to the higher credit costs can also be observed on the crypto market. With FTX, the next coin after Terra was hit with a daily loss beyond the -50% mark. Since such coins can be viewed as a stake in a young startup, the crypto asset class has some things in common with so-called venture capital investments, in which investments are made in young companies. This asset class in particular is severely affected by rising borrowing costs as a result of higher interest rates.
Should we have seen the peak in inflation, this would take the pressure off indebted companies and on young companies in which the credit costs cannot yet covered by the low or non-existent revenue. This hope is driving market participants back into risky asset classes such as stocks. Also, an end, or at least a curtailment, of the no Covid policy by China could ease further pressure on the inflation side.
However, if the next inflation figures should go in the other direction again, then all these hopes will evaporate and probably lead to even stronger sell-offs on the markets than the purchases observed since Thursday.
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Bertan Gueler, CFA