Global Equities Tumble After US Inflation Shock

  • Asian and European stocks dropped Wednesday, as hotter-than-expected US inflation data rattled markets.
  • Inflation rose in August, seen as making aggressive Federal Reserve interest rate hikes more likely.
  • The Chinese yuan traded close to a two-year low on talk of Taiwan-related US sanctions against Beijing.

Global stocks fell sharply Wednesday after the latest batch of US inflation data surprised the market with a rise in the headline rate instead of the slight fall expected.

The MSCI World Index was down 3.7%, having dropped as much as 0.52% earlier in the morning and tracking a plunge in major US stock benchmarks in the wake of Tuesday’s inflation reading.

The Consumer Price Index report revealed that US inflation rose 8.3% in August year-on-year, compared with the 8.1% expected by economists. The CPI is the Federal Reserve’s preferred measure of inflation in its decision making.

Markets are fretting over the hotter-than-expected inflation print because it makes it more likely that the Fed will have to continue hiking interest rates aggressively to bring soaring prices under control.

“Futures are not only pricing in another 75 basis point hike from the Fed next week, but they are now pricing in a meaningful probability of a 100 bps hike, while also viewing the prospect of a fourth consecutive 75 bps move in November as an increasingly likely outcome,” Deutsche Bank managing director Jim Reid said in a note.

In Asian stock markets, Hong Kong’s Hang Seng index plunged 2.47%, Tokyo’s Nikkei 225 tumbled 2.78%, and the Shanghai Composite dropped 0.80%.

Meanwhile in Europe, the pan-continental Stoxx 600 stock index was 0.41% lower. Paris’s CAC 40 slipped 0.46%, the Frankfurt DAX 40 dropped 0.37%. In London, the FTSE 100 fell 0.75% after data showed UK inflation easing, but still near a 40-year high.

In currencies, the Chinese yuan tumbled 0.59% to 6.97 yuan per dollar Wednesday, after Reuters reported the Biden administration is in early discussions on possible sanctions against Beijing over Taiwan.

“The ever-looming geopolitical tail risks provided another nugget yesterday, with Reuters reporting the US was in early discussions of considering sanctions against China to deter an invasion of Taiwan,” Deutsche Bank’s Reid said.

China’s currency was edging toward the two-year low of  6.99 yuan per dollar hit in July 2020. But the greenback stalled against other global currencies, with the US dollar index slipping 0.10%.

Oil benchmarks were broadly unchanged after the International Energy Agency said Wednesday that growth in global oil demand would slow to a halt in the last quarter of this year. Futures were trading lower earlier thanks to concerns that further Fed rate hikes will lead to a recession.

Brent crude futures slipped 0.17% at $93.01 a barrel, while WTI crude was up 0.03% at $87.36 a barrel.