Stock markets started the week on the wrong foot. From paralyzed supply chains to an energy crisis that threatens to cripple Europe and Asia to growing credit risks in the Chinese property sector, there are several threats on the radar forcing traders to play defense.
It’s a perfect storm. Supply chains seem overwhelmed, with disruptions spilling over from ports to the mainland lately amid lorry driver shortages, squeezing corporate profit margins as transportation and energy costs soar simultaneously. This burden could be passed onto consumers, taking a bite out of real incomes.
The fear is that global growth slows down as companies can’t cover demand but inflation remains hot thanks to cost pressures – a toxic combination that central banks are powerless against. And with the fallout from Evergrande spreading across the Chinese property market as more developers miss debt payments, there is a dimension of credit risk as well.
That said, this isn’t a catastrophe either. Growth is unlikely to slow enough to turn this into another recession and investors remain fairly confident that any credit events in China will remain isolated. Hence, there is light at the end of the stagflation tunnel, although it’s too early to call for the bottom ahead of an earnings season that will likely echo worries around growth and inflation.
