U.S. stagflation fears shake global markets

Fears of U.S. stagflation are spreading through global markets, pushing some investors to reshuffle portfolios to limit the damage that tariffs could deal to growth and prices.

A BofA Global Research poll in early August found that about 70% of global investors expect stagflation below-trend growth alongside above-trend inflation in the next 12 months. According to Reuters, Worries have intensified after signs of U.S. labor market weakness, a sharp rise in core inflation, and an unexpected jump in producer prices.

Yet equities remain near record highs, and bond markets are calm. Carmignac fixed-income manager Marie-Anne Allier said, “Stagflation is in the mind of the market, but not the price.”

Persistent inflation, or concern that it will stick, can bruise longer-maturity bonds because fixed coupons lose real value over time. This echoes the growing fears from major U.S. strategists about stagflation previously reported by Cryptopolitan.

Paul Eitelman of Russell Investments, which manages more than $1 trillion for clients, said pensions and insurers are increasingly uneasy about how inflation could hit their bond holdings.

Non-U.S. bonds may offer little relief. “Interest rates and the long end of the bond curve are highly correlated between the G7 economies,” said Mayank Markanday, portfolio manager at Foresight Group. “If you see a big selloff in the long end of the U.S. curve, we are likely to see an impact on some of the others.”

A selloff in long-dated bonds has already taken hold this year: two-year yields are lower in the U.S., Germany, and Britain, while 30-year yields are higher. If persistent inflation prevents the Federal Reserve from trimming rates this year, short-maturity bonds are likely to come under pressure as well.

Global stocks could drop if the U.S. economy slows

Caroline Shaw, a multi-asset manager at Fidelity International, said the firm expects U.S. growth to cool and lists stagflation as one of its two core scenarios. She remains positive on large U.S. technology names but in mid-July bought put options designed to profit if the more cyclical Russell 2000 small-cap index (RUT) falls.

Equities elsewhere would likely weaken even if stagflation were confined to the U.S. Since 1990, world stocks (.MIWD00000PUS) have declined by an average of 15% when U.S. manufacturing reports showed both contraction and higher-than-average prices, said Michael Metcalfe, State Street’s head of macro strategy.

For now, shares keep rising. Metcalfe says investors think “the disruption to the global trading system isn’t going to disrupt big tech earnings.” Man Group chief market strategist Kristina Hooper said markets are leaning toward the positive and downplaying weaker signals.

“It’s like parenting, you only want to see the best in your children, and we’re at a stage where it’s possible for markets to do that,” she said, describing the current mood.

Nabil Milali, multi-asset and overlay portfolio manager at Edmond de Rothschild Asset Management, said the data point to stagflation in the U.S., and he expects more dollar weakness versus the euro.

Investors turn to gold, bonds as dollar faces double stagflation risks

Stagflation creates two problems for the U.S. dollar. Slower growth can weaken a currency, and high inflation reduces how much it can buy in other countries. This year, the euro has gained over 12% against the dollar. The yen and British pound have also gotten stronger.

Stagflation could offer one more reason to add gold, already a common refuge for investors, said Man Group’s Hooper. Other inflation shields may appeal too, such as short-dated inflation-linked bonds, said Foresight Group’s Markanday.

Eitelman said many professionals are using tools such as inflation swaps, contracts that gain value when price indexes surpass a set level. The U.S. two-year inflation-linked swap is close to its highest point in more than two years.