The FTSE 100 was set to plunge more than 1% today after US markets were spooked by renewed fears of inflation.
US government bond yields jumped yesterday as inflation expectations hit their highest levels since 2011 on Wall Street.
Rising commodities prices and survey evidence showing inflation is on the march in the US have been major themes of recent weeks’ trading.
Stock market investors fear that, if it gets out of hand, the Federal Reserve will have no choice but to accelerate plans to tighten its super-easy monetary policy and raise interest rates or taper its asset buying programme.
Both strategies would increase the cost of credit for businesses and hit their share prices.
Sentiment on the issue ebbs and flows day by day, but yesterday the fear gauge was definitely running high on Wall Street, triggering a big fall on the Nasdaq which looks set to spill over into European trading.
While President Joe Biden’s strategy of pushing through trillions of dollars of fiscal support to get the US out of the worst economic effects of Covid has helped share prices, the inflationary side effect of his medicine is also seen as the biggest risk to markets.
The FTSE was being called down 92 points at 7037 before the market opened, with Germany’s Dax down 200 at 15200 and France’s CAC40 76 lower at 6310.
Asian markets fell back this morning after the US slide, not helped by rising inflation in China, where the consumer prices index jumped from 0.4% in March to 0.9% in April.
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Prices of goods leaving the factory gates were accelerating far more quickly, suggesting a margin squeeze could be going on for those selling goods to consumers and businesses.
Producer prices were up from 4.4% to 6.8%. CMC’s Michael Hewson pointed out that this was a dramatic shift from a few months back, when producers were having to cut the cost of their finished goods.
Tech stocks may be likely to bear the brunt of today’s expected sell-off, echoing their US counterparts, but it remains to be seen how markets treat shares in The Hut Group, the e-commerce retailer and technology seller.
When THG floated last year, it was the biggest tech IPO. Most investors focused on the sales growth of its cosmetics and nutrition brands into fast growing countries like China during the lockdown.
However, more promising to others were the prospects of its business-to-business arm which handles online sales for third parties. This division was seen by some investors as similar to Ocado’s B2B robot warehouse service which it instals into other bricks and mortar supermarkets.
Last night, that division got an enormous shot in the arm from SoftBank, the world’s biggest tech investor, which bought a stake in it valuing the whole division at $6.3 billion - the same value at which THG’s entire company was valued at on the IPO.
In fact, SoftBank’s deal is an option to buy a stake in the arm at that valuation rather than cold, hard cash for it, but even so, the Japanese investor is pumping in $730 million as part of a $1 billion fundraiser done through a sale of new shares.
The impact on THG stock today will be closely watched. While some will see it as a major coup that it has brought such a big investor on board with a potentially vast valuation on its new B2B arm, the shares sale was timed at a relatively low period for THG shares.
Having surged last year on the back of sky-high expectations for online sales during Covid lockdowns, the stock has since fallen back to its IPO levels, perhaps meaning SoftBank and the other new investors saw a chance to bag a bargain.
The Queen’s Speech later today was not likely to have any impact on markets, although an easing of planning restrictions prove yet another government-administered boost to housebuilding shares.
NatWest shares could move after the government found buyers for 5% of the majority-state-owned bank. The government was seeking investors to take up 580 million shares, which would take the taxpayer’s stake from 59.9% to 54.8%. Shares plunged 5% yesterday after Sky News reported the placing operation was going on. The government announced the sale had completed after the markets closed last night.
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