US futures dropped with bonds as risk aversion and volatility engulfed markets gripped by inflation and fears of rising inflation.The S&P 500 and Nasdaq 100 contracts showed further declines after yesterday's sell-off, which cut 3.5% from the S&P and 5% from the Nasdaq. Treasuries extended the fall, which lifted the underlying yield above 3%.
The next pressure point for markets will be today's US jobs report, which will be closely watched for signs that rising wage costs are adding to inflationary pressures, scaring investors. Economists estimate that the number of employed people will rise by 380,000 in April and that the unemployment rate will fall to 3.5%.
Although the labour market is still hot and the US consumer resilient, there are growing fears that the US economy will crack under higher rates. There is also the prospect that these rates will not be enough to cool the fastest inflation in four decades.Any upward pressure on average hourly earnings could lead to another surge in US yields and therefore put negative pressure on equities and especially technology stocks, Christophe Barrot, chief economist at Market Securities LLP in Paris, said.
The global energy crisis and increasingly hawkish central banks are fuelling fears that key economies will slide into 1970s-style stagflation. A toxic mix of rising costs, falling employment and slow growth may seem a remote risk, but the unexpected contraction in US economic growth last quarter reinforces the bearish outlook.Meanwhile, European equities extended their losses and are poised for their worst weekly drop in two months.
