Gold hits 3-month high on inflation concerns

Global shares have paused after a strong end to the previous week, while gold hit a three-month high as surging COVID-19 cases in some Asian countries and inflation pressures tempered demand for riskier assets.

Markets have been skittish in recent weeks as bumper supplies of central bank stimulus and rising prices in the United States and other countries fuel concerns some economies could overheat, requiring policymakers to tap on the brakes.

The MSCI World Index, a broad gauge of equity markets globally, was flat in early European trade, albeit less than 2 per cent from a recent record high. That followed its best day since February on Friday after an early week inflation-driven selloff.

“What markets are doing is hoping for the best and preparing for the worst,” said Fahad Kamal, chief investment officer at Kleinwort Hambros, although adding he felt the inflationary pressures would dissipate.

Equities were also benefitting from the TINA, or ‘There Is No Alternative’, factor, he said.

“Stock market valuations are not giving the green signal but the question is: compared to what? If you buy bonds you are almost guaranteed to lose money. So the market is more tolerant of higher valuations that it would normally be.”

While last week’s recovery was driven by supportive comments from US Federal Reserve officials, the market remains twitchy around any sign of inflationary pressures building, such as those seen in overnight economic data from Asia.

April wholesale prices in Japan, the world’s third-largest economy, rose at their fastest pace in six and a half years, as rising energy and commodities costs ate into corporate margins, although consumer price inflation remains subdued.

In China, meanwhile, retail sales rose 17.7 per cent in April from a year earlier, although they fell short of forecasts for a jump of 24.9 per cent, while industrial output matched expectations with a rise of 9.8 per cent.

MSCI’s broadest index of Asia-Pacific shares outside Japan was flat, while Japan’s Nikkei lost 0.8 per cent and Chinese blue chips rose 1.4 per cent. S&P 500 futures and Nasdaq futures were both flat.

The spread of the coronavirus was also a drag with Singapore to shut most schools from Wednesday after reporting the highest number of local infections in months.

Taiwan’s government on Monday had to reassure investors it would stabilise stock and foreign exchange markets if needed amid a spike in COVID-19 cases. Yet, stocks there were still down 3.6 per cent.

The US data calendar is light this week, putting the focus on minutes of the Federal Reserve’s last policy meeting for any clue when officials there might start to talk about tapering.

So far, most Fed members have been doggedly dovish on policy, arguing a spike in inflation was transitory, though there was a risk it could get baked into expectations.

The University of Michigan consumer survey last week showed the highest expected year-ahead inflation rate as well as the highest long-term inflation rate in the past decade.

After reaching a six-week peak just above 1.70 per cent last week, 10-year Treasury yields edged lower and were last around 1.62 per cent on Monday.

The dollar pretty much tracked the move in yields, bouncing to 90.909 on a basket of currencies before steadying at its current 90.291. The euro was last at $1.2144, having climbed 0.5 per cent on Friday as yields eased.

Bitcoin fell a further 8.7 per cent to its lowest since February after tweets from Elon Musk hinted that Tesla may have sold, or will sell, its holdings.

The dip in the dollar combined with inflation concerns on Monday to lift gold to a three-month peak of $1,853 an ounce, while oil edged lower, with Brent and US crude both down around 0.1 per cent-0.2 per cent.