Inflation data causes market havoc

The higher than expected inflation rate in the US for September has had a big impact on markets. Treasury yields have risen across the curve, US stocks are sharply lower and the chances of a Fed rate hike later this month have doubled in a week to 40%. 

The September CPI data was the fastest pace of increase since April, this has boosted US rate hike expectations, which is causing investors to rethink the outlook for stocks and earnings. The Nasdaq is leading the sell off in US blue chips, and is down more than 1.6%, while the S&P 500 is down by more than 0.9%. Small cap US stocks that are interest rate sensitive are also falling on Wednesday. 

Macro data clouds earnings reports 

For now, macro data is superseding earnings data. Although Bank of America reported weaker than expected trading revenue and a charge tied to regulatory penalties, Morgan Stanley delivered a strong set of results, further reinforcing the view that equity trading is driving earnings at some Wall Street banks for last quarter. 

Investors turn defensive 

The sell off in US stocks is being led by the AI trade, and tech and industrials are getting hit hardest. In contrast, healthcare, consumer staples and energy stocks are outperforming, as investors turn defensive. 

An environment of rising geopolitical risk alongside the prospect of higher interest rates is not a risk-positive environment, and we could see US tech-heavy indices struggle over the coming days after reaching record highs last week. 

Earnings have been the main force propping up equity markets this year, however, at this early stage of the season, investors are looking at other longer term drivers of corporate earnings, and they don’t like what they see. 

FTSE 100 gets a boost from volatility 

From a regional perspective, the rush to defensive stocks is boosting the FTSE 100, which is the top performing major world index in the past week, and is higher by 1.7%. This outperformance may continue, the UK’s index managed to eke out a 0.7% gain today, even though US indices were drenched in volatility. 

The oil price is above $106 and is remaining stubbornly elevated as we move through October, which is another risk factor for some equity indices. It also raises the prospect of elevated inflation for the long term, since Brent crude has risen by a further 2% in the past week. Thus, it could be some time before the US, and the rest of the world, sees an easing of price pressures. 

Inflation the main narrative for gold price 

Inflation is the single narrative that is driving bonds and equities right now. The hotter than expected inflation report is also weighing on the gold price, since yields are rising and gold yields nothing. The gold price is down nearly 2% today, and is below $4,100, opening the door to a steeper decline towards $4,000. 

AI stocks at bargain basement prices 

There are steep declines for US AI names like SanDisk, which is down by another 5% on Wednesday, it is lower by nearly 14% in the past 5 sessions. It now has a forward P/E ratio of 8x future earnings, which is less than half the rate of the overall Nasdaq 100, which has a forward P/E ratio of 22 times. The latest sell off in AI stocks is eroding valuations further, at what point do investors see these stocks as a bargain? Only when that happens can the recovery begin.