The Hindu Business Line : Inflation stokes rate fears again

Two out of three Asian major indices ended up in the red this week as soaring oil prices, inflation worries and a falling dollar compelled shaky investors to sell stocks. Foreign investors sold equities worth $879 million in India, $377 million in Thailand and $174 million in South Korea, according to Bloomberg data for the week. Japan was the one of the few markets to have seen weekly FII inflows ($2.6 billion) and consequently the index was up by 1 per cent for the week, buoyed by gains in exporter stocks due to a weaker yen.

Compared to Asia, European markets fared worse. 25 out of 28 European major indices were in red, recording their biggest weekly decline in four months, due to concerns related to oil. A report of the sharpest one-month rise in the U.S. unemployment rate in 22 years added another layer of negativity to weak sentiment. Even as equity investors and government officials hoped to see a ‘demand destruction’ for oil, the price of crude rose almost 10 per cent in the last two days of the week. India and Malaysia joined the select group of Asian governments this week to have increased prices or loosened up price controls. The governments of Indonesia, Taiwan, Pakistan and Sri Lanka have already risked their political aspirations by taking similar initiatives earlier.

Interest rates

In Asia, Pakistan (8 per cent) and Taiwan (3 per cent) were the only major gainers. One of the remaining options left for some Asian governments, in their battle against inflation, would be to hike interest rates. Elsewhere in Europe, though the European Central Bank and the Bank of England left their benchmark interest rates unchanged on June 5 – markets expect that officials may raise interest rates next month to combat their own problems with inflation.

In United States, the root of recent financial problems, NASDAQ and Dow Jones fell 2 and 3.4 per cent for the week respectively. Most of the losses came on Friday after U.S. statistics showed job losses for a fifth straight month, strengthening worries about an economy in recession. Investors in commodities had a fabulous week with futures related to crude, natural gas, wheat, and precious metals going up by 3-9 per cent for the week. If the sensitivity to the US unemployment data is anything to go by, investors would be glued to the statistics expected next week- pending home sales (June 9), retail sales (June 12) and core consumer price inflation (June 13).

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