Inflation threat drives down stocks and cryptocurrencies

London/Tokyo — Global stocks slipped and cryptocurrencies sank on Wednesday as a threat of unwanted inflation had investors shy away from assets seen as vulnerable to any removal of monetary stimulus.

Digital coins were also under pressure from new Chinese restrictions on financial institutions providing services related to cryptocurrency transactions.

With bitcoin earlier hitting its lowest level since early February and as the dollar wallowed a near-three month low against its rivals, prices of gold — viewed as a hedge against inflation — held near a four-month peak.

“Institutional investors appear to be shifting away from bitcoin and back into traditional gold, reversing the trend of the previous two quarters,” JP Morgan analysts including Nikolaos Panigirtzoglou wrote in a research note.

“The bitcoin flow picture continues to deteriorate and is pointing to continued retrenchment by institutional investors.”

The risk-off sentiment pervaded in equity markets as focus was locked on the US. Federal Reserve’s release later on Wednesday of the minutes of its April meeting, which will be watched for any indication about monetary policy in the US.

Europe’s Stoxx 600 index dropped 1.3% at the opening, on course for its biggest drop in more than a week, while MSCI’s gauge of stocks across the globe drifted 0.2% lower.

MSCI’s broadest index of Asia-Pacific shares outside Japan dropped 0.5%, though Hong Kong and South Korea are closed for holidays. Japan’s Nikkei lost 1.3%.

US S&P futures fell 0.5% in Europe a day after Wall Street stocks slid in late Tuesday trade, unable to sustain gains made after bumper earnings from Walmart and Home Depot.

While demand is recovering fast as many developed countries have made progress with Covid-19 vaccination, companies are facing obstacles from shortages of chips, containers, and in the US workers, too, stoking worries of higher prices.

Mirroring a move under way in the US as the global recovery takes hold, British consumer price inflation more than doubled to 1.5% in April, data showed on Wednesday.

Eurozone inflation data for April is due at 9am GMT, with data for Canada due later.

In the US, the Fed has stuck to the narrative that a recent rise in inflation would be transient and that it therefore should keep its easy monetary policy settings.

The minutes from April’s meeting are expected to repeat that message.

“Inflation remains the biggest theme, whether it is real and whether the Fed may need to change its policy because of that,” said Kazushige Kaida, head of forex sales at State Street Bank’s Tokyo branch. “At the moment, markets are putting faith, after a fashion, in the Fed’s narrative.”

Investors remain cautious following an unexpected pickup in US consumer inflation shown earlier this month.

Any further flare-up could hit assets whose prices have been bolstered by monetary easing, including cryptocurrencies, which rose sharply over the past year and are seen by some as exemplifying an excess created by a “wall of money” from central banks.

Bitcoin dropped as much as 10.2% to hit its lowest level since early February, bringing its loss from a peak of $64,895 hit just over a month ago to more than 40% at that point. It last stood 6.4% lower at $40,157.

Ether, the second-largest cryptocurrency, shed as much as 15.5%, and a third of its value from its record peak hit last Wednesday. It last changed hands at $2,946, down 10.7%.

While cryptocurrencies were bruised by China’s fresh ban on their transactions, they were not alone in facing pressure.

Some commodities that have benefited from reflation trade have also lost steam, with US lumber futures losing around 20% in the last three sessions.

Oil prices pulled back for a second day on simmering demand concerns as coronavirus cases in Asia rise and on fears of rising US interest rates, which could limit economic growth.

US crude futures dropped 1.2% to $64.69 per barrel while Brent futures lost 1.1% to $67.98 per barrel.

US. Treasuries were relatively calm, with the 10-year yield up two basis points and trading within the month’s ranges.

In Europe, the benchmark German bund yield climbed to a two-year high as investors increasingly priced in the possibility of the European Central Bank slowing its bond-buying. Germany’s 10-year bond yield was up three bps at -0.081%. Italy’s 10-year yield was up five bps at 1.1455%, its highest since September 2020.

In currency markets, the dollar stayed under pressure.

The euro hit a near three-month high of $1.2244 while the pound held firm at $1.4181, staying near a three-month peak touched on Tuesday.

The dollar stood at ¥109.06 after four straight sessions of decline.

After gold hit its highest level since late January on Tuesday, it last stood broadly flat at $1,867.46/oz .

Reuters