It’s the next big market call that could enrich traders across Wall Street: The raging global energy crisis and ever-more hawkish central banks knock key economies into 1970s-style stagflation.
It’s a long shot for now, but anxiety is building among money managers that this market scenario -- out-of-control inflation just as growth slumps -- will eventually come to pass, especially in Europe.
Global growth optimism sunk to an all-time low, according to this month’s Bank of America Corp. fund manager survey. Stagflation expectations jumped to 66%, the highest since 2008. U.S. price pressures rose in March by the most since late 1981, while data Wednesday showed U.K. inflation exceeded the estimates of economists for the sixth straight month.
Money managers are increasingly prepping for bad economic news -- and nowhere more so than in Europe, belying hopes coming into this year that the region will outperform the U.S. Amundi SA is prepping for a possible downturn in the continent, abrdn Plc is long the U.S. dollar against the euro and Vanguard Group Inc. is touting liquidity hedges.
Other in-vogue trades include bets on commodity exporters from Australia to Canada and wagers against bonds teeming with interest-rate risk.
A lot of bad things need to happen before an investing climate that bears the hallmarks of stagflation transpires, with European Central Bank President Christine Lagarde among those pushing back against the likelihood. A decision Thursday gives rate-setters an opportunity to debate their timetable for tightening.
But one thing’s for sure: If newbie traders have limited real-world experience with inflation, fewer still can recall a world of runaway prices just as growth tanks.
Even if stagflation-like pressures are limited to Europe, they have the capacity to hurt Wall Street traders betting on the international growth story, while evoking memories of the sovereign debt crisis and the lost-decade of growth.
The region is epicenter of concern, given its proximity to Russia’s war and weaker domestic levers for growth. German breakevens, a debt gauge of expected price pressures over the next decade, have risen over one percentage point so far this year. While the market-derived price level for the U.S. is higher, the rate of change is more than three times greater.
Below is a collection of money-manager views. Comments have been edited for clarity.