[Comprehensive] Stagflation Fear Causes Market to 'Plummet'... Stock Market Sinks, Uncertainty Grows

[Asia Economy New York=Special Correspondent Joselgina] Anxiety quickly turned into fear. Global stock markets have plummeted amid fears of ‘stagflation.’ With inflation already severe, the West, including the United States, considering energy sanctions has heightened fears that stagflation shocks?characterized by low growth and soaring prices?could follow.

As Russia’s invasion of Ukraine enters an unpredictable phase, global financial markets appear to be sinking into turmoil. The prolonged Ukraine crisis has compounded the Federal Reserve’s (Fed) tightening stance, which had been cited as a cause of the stock market downturn since the end of last year. There are even predictions that the tech-heavy U.S. Nasdaq index will enter a bear market, followed by others.

◆ Nasdaq and Others Enter Bear Markets One After Another

On the 7th (local time), the Dow Jones Industrial Average in New York closed down 2.37% from the previous session, entering a ‘technical correction’ with a drop of more than 10% from its previous peak. The S&P 500 and Nasdaq indices, which had already entered correction territory earlier, also fell by 2.95% and 3.62%, respectively. The Nasdaq index’s decline exceeded 20% from its previous peak on this day, officially entering a ‘bear market.’ It is the first time since February 2020 that the Dow has entered a correction, and the first time since March 2020 that the Nasdaq has entered a bear market.

The Nasdaq’s entry into a bear market was essentially a foregone conclusion, having fallen nearly 18% so far this year and maintaining a steady downward trend. Since entering a technical correction on January 19, the Nasdaq has continued to deepen its losses daily.

It is not just the New York stock market. Germany’s DAX index and the Euro Stoxx 50 index closed down 1.98% and 1.25%, respectively, entering bear markets. France’s CAC40 index briefly entered a bear market during trading but managed to exit it by the close. As major countries’ stock markets slid one after another, on the morning of the 8th, Asian markets such as South Korea’s KOSPI and Japan’s Nikkei 225 also opened lower.

The backdrop to this global ‘Black Monday’ is the fear of stagflation. Investor sentiment, already frozen by the prolonged Ukraine crisis, was further dampened when the U.S. signaled its intent to sanction Russian oil. The soaring energy prices are feared to trigger inflation and damage the economy, acting as a negative factor. However, European markets saw smaller declines than New York’s, partly because Germany, a key pillar of the EU economy, opposed sanctions on Russian energy.

Oxford Economics’ Chief U.S. Economist Kathy Bostanich assessed, "This reflects concerns that the shock could evolve from a simple inflation shock into a stagflation shock."

Edward Moya, Chief Analyst at OANDA, analyzed in an investor note, "With ongoing uncertainty in Ukraine and soaring commodity prices adding to concerns about economic growth prospects, the stock market declined." Hans Olson, Chief Investment Officer at Fiduciary Trust, said, "The market is in a very unstable situation. Considering the current rapid price increases and inflation, it is a combination that makes it difficult for the stock market to maintain its value."

[Image source=Reuters Yonhap News]

◇ Growing Uncertainty: "World War III Has Already Begun"

If additional sanctions cause energy and commodity prices to rise further, uncertainty surrounding global financial markets and the real economy is expected to increase significantly. The Biden administration is reportedly considering independently banning imports of Russian oil, given the lukewarm stance of some European countries.

Commodity prices are already soaring. Nickel prices surged as much as 90% intraday, marking the largest single-day increase ever. LME aluminum prices hit a record high of $4,073.5 per ton during trading. International oil prices, which had surged past $130 per barrel the previous day, eased somewhat as Germany and others showed reluctance toward energy sanctions, but upward pressure remains. Russian Deputy Prime Minister in charge of energy, Alexander Novak, warned that prices could exceed $300 per barrel amid Western energy sanctions, signaling a sharp rise in oil and commodity prices.

UBS Global Asset Management downgraded its investment outlook for global and Eurozone stock markets to neutral. UBS cited increased uncertainty from the Ukraine war, potential additional sanctions on Russia, soaring commodity prices, and central bank tightening policies as reasons for the downgrade.

Unlike in the past, the intensity of Western sanctions is higher, suggesting significant ripple effects. Major institutions currently see a high possibility of Russian sovereign debt default, expected as early as around April 15. Morgan Stanley predicted, "It will unfold similarly to the Venezuela case."

These impacts will not be limited to Russia. Oxford Analytica evaluated, "In the coming months, rising energy and commodity prices will exert broad inflationary pressures from essentials to industrial goods." JP Morgan forecasted that if the U.S. and Europe block Russian oil exports, global GDP could decline by 3 percentage points.

This is expected to increase volatility in financial markets surrounding inflation and recession concerns. Bill Ackman, CEO of Pershing Square Capital and a billionaire hedge fund magnate representing Wall Street, warned on Twitter, "World War III has already begun."

Jerome Powell, Chairman of the U.S. Federal Reserve (Fed), who has been signaling a rate hike in March
[Photo by Reuters Yonhap News]

◇ Fed and ECB... Central Banks’ Calculations Become More Complex

As stagflation warnings grow louder, the calculations of central banks worldwide, including the Fed, have become more complicated.

The Wall Street Journal (WSJ) reported that the Fed and the European Central Bank (ECB), which had signaled monetary tightening to curb inflation, may slow their pace ahead of their regular policy meetings this month. This is to reflect new risk factors such as soaring commodity prices, comprehensive financial sanctions, and the possibility of banning Russian oil exports.

WSJ stated, "Economists are increasingly warning about the possibility of stagflation in the 1970s style, where inflation surges amid low growth, complicating central banks’ tasks." The Fed will hold its Federal Open Market Committee (FOMC) meeting on the 15th-16th, and the ECB will hold its monetary policy meeting on the 10th.

Concerns about stagflation represent a nightmare scenario for central banks. Efforts to reduce inflation could inadvertently dampen economic recovery. However, slowing the normalization of monetary policy to avoid recession risks could further entrench stagflation. New York University professor Nouriel Roubini pointed out, "We have already witnessed this scenario twice during the oil shocks of 1973 and 1979."

Currently, institutions such as HSBC and Bank of America (BoA) expect the Fed to continue its hawkish stance this year, citing the U.S.’s relatively low exposure to Russia and solid economic growth momentum. However, the ECB is more likely to keep interest rates steady due to risks of economic slowdown in the Eurozone.