LONDON (ICIS)--European chemical company stocks were trading down on Monday following local markets which opened in the red as the delayed impact of the worst weekly performance for US markets in two years built on expectations of rising inflation.
Stronger-than-expected US employment data on Friday raised market expectations that the country’s Federal Reserve may tighten monetary policy on the back of better workplace participation and wage growth.
Months of robust eurozone economic data and bullish projections for global growth by organisations including the IMF have raised expectations that the loose monetary policy measures introduced to backstop foundering economies in the aftermath of the financial crash may be tightened.
The prospect of higher global interest rates prompted a sell-off in equities across most of the globe, with the US Dow Jones Industrial Average (DJIA) tumbling almost 666 points at the time of Friday’s close, a drop of 2.5%.
Stock market unease drove capital into the US bond market, with the yield on 10-year Treasury notes rising to over 2.8%, the highest level since mid-2014, with a rise to 3% seen as a potential signal of a stock market correction.
Asian markets followed the trend in the US, with Japan’s Nikkei 225 closing down 2.55% on Monday.
Stock prices on European bourses also trended down in early trading, with the UK’s FTSE 100 and France’s CAC 40 falling around 1%, and Germany’s DAX index down 0.65% compared to Friday’s close as of 10:31 GMT.
Nearly all of the 30 firms traded on the DJ Euro Stoxx chemicals index were trading down on Monday, with shares in Evonik, Bayer, Johnson Matthey, OCI, Covestro, Yara, K+S, EMS Chemie, Fuchs Petrolub and Hexpol all down by over 1% compared to Friday’s close
February’s Sentix eurozone investor confidence indicator came in below expectations at 31.9, attributed in part to worries over coalition-building efforts in the German Bundestag.
The drop in confidence, despite the announcement of yet more banner economic data for the region published on Monday, is likely to worsen next month if weaker investor sentiment crosses over into general economic sentiment, according to analyst Pantheon Macroeconomics.
“[Confidence] will be much worse next month if the current slide in both bond and equity prices continue. The split between the expectation and current situation index also signals downside risks,” said Pantheon's chief eurozone economist Claus Vistesen.
“The key risk is that a decline in investor sentiment spills over into economic confidence,” he added.
Expectation in international bond markets remains that low inflation will remain in place for the time being, according to analysts at Deutsche Bank, meaning that the impact of a sudden tightening of monetary policy in key markets could be severe.
“Global bond markets are still set up for a long period of low inflation ahead, in our view,” said Deutsche Bank head of global fundamental credit strategy Jim Reid.
“In [recent conversations], the biggest push back to our view was that most didn’t believe inflation would misbehave as much on the upside in 2018 as we did, so I don’t think markets will be well prepared if it does,” he added.
The European Central Bank has tapered the extent of its bond-buying programme in recent months, but has held back from offering any definitive guidance on when key interest rates will increase.
Meanwhile, the US financial sector is watching Federal Reserve chair Jerome Powell, who replaced Janet Yellen as the chief of the central bank on Friday, for strategy indications.
(Pictured: Frankfurt Stock Exchange Trading Floor. Source: Uwe Kraft / imageBROKER/REX/Shutterstock)