Global stocks endure worst week since February

Global stocks experienced the worst week since February after a choppy period where a US inflation scare and fears of tighter central bank policy were juxtaposed with bullish forecasts on the global economic recovery.

The FTSE All-World index of large-cap shares rose 1.6 per cent on Friday but ended the week 1.5 per cent lower, its worst performance in almost three months.

On Wall Street, the S&P 500 was up 1.5 per cent at the close in New York, its biggest weekly drop since February after reaching a record last Friday. The tech-heavy Nasdaq Composite index climbed 2.3 per cent but was still 2.3 per cent lower for the week.

Data on Wednesday showed US inflation rose 4.2 per cent year on year in April, sending shares tumbling worldwide as fears increased that the Federal Reserve would step in to prevent the economy overheating by tightening borrowing costs.

Fed policymakers have said that jolts of inflation are likely to be transient as the effects of last year’s lockdown restrictions work their way through the economy.

“We need to be patient, steely-eyed central bankers, and not be head-faked by temporary data surprises,” said Christopher Waller, a Federal Reserve board governor, this week.

A partial recovery across global stock markets on Thursday and Friday showed investors believed that “buying into dips is the right strategy because it has served them very well over the past year”, said Sunil Krishnan, head of multi-asset funds at Aviva Investors. “If you believe in what monetary policymakers are saying, then it is the right thing to do.”

However, if inflation “is not that far below 3 per cent in a year’s time, you can’t escape the gravitational pull on real purchasing power for too long”, he warned.

On Friday, the University of Michigan’s monthly survey of consumer sentiment showed households expected inflation to hit 4.6 per cent this year, up from 3.4 per cent when they were questioned in April. A sentiment index produced by the university also fell to a reading of 82.8 in May, down from 88.3 in April.

US Treasury bonds, which have increased in price over the past two New York sessions as investors shrugged off the inflation jitters, continued to rally on Friday.

The yield on the benchmark 10-year Treasury, which moves inversely to its price, fell almost 0.04 percentage points to 1.63 per cent.

In Europe, the Stoxx 600 regional share index closed up 1.2 per cent, capping off a volatile week with a 0.5 per cent loss.

Kasper Elmgreen, head of equities at Amundi, said he was “cautious” about the stock market in the near term because much of the developed world’s recovery from coronavirus was already baked into share valuations.

“After we’ve all had our first haircut and our first pint inside, what comes next?” he said, pointing out that China’s early economic rebound from the pandemic was followed by a stock market correction in late March, as traders banked gains and anticipated inflation.

The dollar index, which measures the greenback against a basket of big currencies, fell 0.35 per cent after US retail sales growth unexpectedly stalled in April. The euro rose 0.5 per cent against the dollar to purchase $1.2143. Sterling rose 0.3 per cent to $1.4094.

Brent crude, the international oil marker, climbed 2.5 per cent to $68.71 a barrel.