While Western economies are still fighting high prices, China appears to have the opposite problem. Here’s how markets reacted.
World markets tumbled between July 7-11th, with bullish and bearish moments alike. Unfortunately, by the end of the week, the latter seems to have prevailed. American inflation and Chinese deflation drove the overall market trends.
But first, let’s start with some numbers:
- The S&P 500 slid -1%, while the Nasdaq Composite and the Dow Jones similarly underperformed closing at -2,05% and -0,15% respectively;
- Frankfurt and London continued their long-time bearish trend, closing at -0,50% and -0,56%;
- Market scare dominated Milan after the Italian government enacted a tax on banks’ extra profits. The Milan stock exchange closed at -1,11%;
- In China, Shanghai and Hong Kong tumbled by -2,67% and -2,05% respectively;
- On the contrary, the Tokyo Nikkei rejoiced China’s crisis and climbed by +1,31%.
US inflation on the rise (again)
US July inflation increased by 0,2% from June, fresh Tuesday data revealed. Core inflation, on the other hand, dropped by 0,1% to 4,7%.
This means US headline inflation is now at 3,2%; still far from the Fed’s 2% target.
Markets were expecting an increase to 3,3%; therefore did not immediately react to the news. Some stocks even rallied briefly before starting to come down.
But high uncertainty over the Fed’s September decision is sending shivers down investors’ spines. Fed chairman Jerome Powell has not revealed their intention yet.
Markets predict (and hope) for a stabilization in interest rates, but analysts say it’s very unlikely. Good economic data (high GDP, low unemployment) and increasing inflation are usually two indicators of upcoming rate hikes.
But the Federal Reserve has increased interest rates almost non-stop since March 2022. As core inflation is starting to come down, the Fed might decide to ease on monetary tightening to avoid a recession in 2024.
China’s deflation
While Western economies continue to fight inflation, China’s crisis now has a definitive name: deflation. China’s prices are decreasing too fast, analysts say, and the economy is not giving positive signs.
The Chinese government lifted Covid restrictions in December 2022, but the country’s economy is far from pre-Covid levels and has not experienced the same rebound Western countries had.
GDP in the second quarter fell short of expectations and exports reach new lows every month. Overall, China is increasingly isolated from the world economy as its manufacturing sector weakens.
The main culprit for this crisis is most definitely the US trade war with China. Restrictions on chip exports and trade are further aligning China with Russia against Western countries.
The global economy is experiencing dark times and might be headed to even darker ones.
