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Stocks Rally Worldwide As Inflation Fears Subside With Fed Comments And China Crackdowns

Topline

Stocks are inching back toward record highs in the U.S. Tuesday—and nabbing new records abroad—as investors overlook the inflationary concerns that rocked markets in recent weeks thanks in part to steadfast messaging from the Federal Reserve, which continues to insist it doesn’t expect problematic price spikes ahead.

Key Facts

Shortly after the market open, the Dow Jones Industrial Average ticked up 80 points, or 0.2%, to come within 1% of its latest high earlier this month, while the S&P 500 added 0.3%, floating about 0.5% below its recent peak.

Vital Knowledge Media founder Adam Crisafulli pinned the gains to Monday comments from Federal Reserve officials, who downplayed inflation risks, and a regulator crackdown in China aimed at curbing commodity price gains the government blames on “excessive” speculative trading.

Chinese investors plowed into stocks Tuesday after commodities prices plunged on the heels of a “zero-tolerance” warning from Beijing officials against “abnormal transactions and malicious speculation,” pushing Hong Kong’s Hang Seng Index up 1.8% and Shanghai’s SE Composite 2.4%.

Meanwhile, Germany’s DAX Index climbed 0.6% to a new all-time high Tuesday morning after a $22 billion deal was announced between two of the country’s largest real estate developers and new data showed the nation’s leading economic indicator—reflecting investor optimism—rose to a two-year high in May. 

Despite relative weakness in the United Kingdom and France, the European benchmark index Stoxx 600 touched an all-time high as well on Tuesday, as markets in Switzerland, Denmark and Hungary also reached new peaks.

Crucial Quote 

“Investors should be careful about celebrating prematurely,” Crisafulli said Tuesday, noting that the S&P has struggled under recent highs for several weeks and saying bouts of volatility are likely ahead of the Memorial Day holiday. “This is a quiet, holiday-influenced week with liquidity air pockets that make it easier for the tape to move.”

Key Background

Bold central bank measures around the world helped ward off a grave and prolonged economic downturn during the pandemic, but experts in recent weeks have been worried that a global economy awash with cash could cause problematic inflation and tank markets down the line. The tension came to a head before this month’s consumer price index report, which showed inflation spiked to a 13-year high of 4.2% in April. Stocks are now starting to take a breather with many investors believing economic readings won’t get any worse, but a slew of releases due out in early June should test that optimism. 

Tangent

A slew of Fed governors on Monday defended the central bank’s easy monetary policy, with Fed Board Governor Lael Brainard saying she sees inflation pressures fading and recent price spikes in certain products and services subsiding over time. “The Fed is clearly thinking that the inflation we’re getting is just temporary and by the time we hit Labor Day, inflation is going to head lower,” Stan Shipley, a fixed income strategist at Evercore ISI, told Reuters Monday.

What To Watch For

Next week’s Friday jobs report is the final one before the Fed’s Federal Open Market Committee meets on June 16 to discuss its accommodative policy and the potential for tapering. Crisafulli says the report could be underwhelming, which would likely help the Fed prolong its current measures.

Further Reading

Dow, S&P 500 Finish Lower In Turbulent Week, But Nasdaq Snaps Four-Week Losing Streak (Forbes)

Inflation Spiked 4.2% In April—Hitting 13-Year High As Price Concerns Rock The Market (Forbes)

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