Stagflation pulls down Asian stocks

The dollar nearly reached a two-month low against the euro after a report on Wednesday showed that US private employers cut the most jobs in nearly six years.

Investors will focus on whether policymakers from the European Central Bank (ECB) expected to deliver the first rise in interest rates in a year, will announce that the cost of borrowing will have to rise in order to fight inflation.

This is set to further weaken Asian stocks, in the midst of a combination of rising inflation and slowing growth – known as stagflation – that is gripping the region.

The MSCI index (a collection of stocks from all developed markets) of Asia-Pacific shares traded outside of Japan fell 1.4 per cent to the lowest since the collapse of the US subprime mortgage sector turned into a global credit crisis 10 months ago.
   
“What seems to be happening is we’re seeing outflows from emerging market equities and outflows from sovereign bonds, which is not a surprise given the inflation backdrop,” said Dwyfor Evans, strategist with State Street Global Markets in Hong Kong, which tracks cross-border capital flows.
   
“People are moving toward a more defensive, safer haven strategy when it comes to holding equities.”

The oil factor

As consumer confidence falls, slowed economic growth is attributed by many to rising oil prices.

Oil rose to $145 a barrel on Thursday, heightening expectation that the $150 barrier could be breached soon.
   
A month ago, investment bank Morgan Stanley, one of the biggest energy traders, said crude oil might reach $150 by July 4 due to increased Asian demand and falling inventories.