Global markets dip as investors again sour on tech stocks

Good morning. Nasdaq’s nifty bounce yesterday, its biggest gains since April, seems like a distant memory as markets turn negative once again on Thursday. Nasdaq futures suggest roughly one-third of yesterday’s gains will evaporate at the opening bell. What else is on tap? A big ECB meeting, jobless claims numbers and a largely meaningless Senate vote on a “skinny” stimulus spending package.

Let’s check in on the action.

Markets update

Asia

• The major Asia indexes are mixed in afternoon trading, with Japan’s Nikkei leading the way, up nearly 0.9%.
• Yum China, the parent company of KFC, Taco Bell and Pizza Hut in China, had a rough Hong Kong trading debut today, with shares down more than 4% at one point.
• Is TikTok owner ByteDance trying to engineer a plan B? The Wall Street Journal reports that ByteDance is in negotiations with the U.S. government on a possible work-around where it avoids a full sale of the U.S. division of the popular video-sharing platform.

Europe

• The European bourses were mostly up at the open, before falling. Brexit concerns continue to spook investors with the FTSE, down 0.5% an hour into the trading session, the biggest laggard.
• Speaking of the divorce proceedings…Post-Brexit negotiations are going about as poorly as you could imagine with the EU now pondering a fresh round of legal action against the U.K. Meanwhile, investors have gotten an ugly early glimpse of divorcee-Britain as money pours out of U.K. equities and away from the British pound. Woe Britania.
• With the euro gaining strength and Euro Zone economic output fragile, the ECB will reveal today its latest plan to keep the post-pandemic recovery on track. Expect a lot of words to tamp down the rising euro.

U.S.

• U.S. futures have been losing ground all morning. That’s after tech stocks led an impressive rebound on Wednesday, pushing the Nasdaq up 2.7%.
• Where will tech stocks go from here? The market pros are encouraged by the buy-the-dip bounce-back yesterday, but, they say, the real test comes today. As I type, it’s not looking good.
• The Senate today votes on a “skinny” $500 billion stimulus package, which is unlikely to proceed much further through Congress.
• Jobless claims come out before the bell with economists predicting that roughly 850,000 Americans will have filed for unemployment benefits in the past week.

Elsewhere

• Gold is down, trading above $1,950/ounce.
• The dollar is flat.
• Crude is down, with Brent trading above $40/barrel.

***

The i-word

Yesterday in this space, I talked about the demise of value stocks. A refresher: value stocks underperform in periods of stagnant economic growth and low inflation. That makes sense. Value stocks, which are underpriced relative to the sales, profits (and don’t forget dividends) they generate, perform better in a period of stable economic growth with no shocks (i.e, pandemics).

And value stocks have been relatively weak over the past decade coinciding with a period of low inflation. In fact, inflation has been wimpy since the Reagan years.

However, there have been a number of economists predicting lately that prices won’t stay down for much longer. They often cite the trillions in fiscal spending and super-loose monetary policy that have deluged the economy with cheap credit. The latest such prediction comes from economists at Berenberg Bank, who write in an investor note today, “we conclude that the 40-year trend of declining inflation has likely run its course.”

But there’s a catch. “We expect underlying inflation to rise gradually on trend over the course of this decade after a final dip over the next six to 12 months,” the authors continue. In other words: don’t horde up on gold just yet; prices will fall before they climb again.

Here’s Berenberg’s chart showing the trend line for core inflation for G7 economies perking up.

UBS economist Paul Donavan explains that one of the factors holding back inflation in the short term is CPI. “Consumer prices are understating inflation more than producer prices at the moment,” he says. “There are plenty of relative price moves, as demand patterns shift and supply chains are disrupted, but this remains a lower inflation world.”

Inflation won’t begin to return to normal levels (of at least 2%) until the labor market improves. So, in a way, the return of meaningful inflation should be celebrated. It’s a sign we’re returning to full(er) employment and economic growth.

But rising inflation will come with a cost to the weak. “Countries and companies that looked shaky even before the pandemic; suffered very badly during the downturn; and/or are hit by the lasting structural shifts caused or accentuated by COVID-19, will eventually face serious problems from rising financing costs,” the authors write. “This may well include Italy and, possibly, even the U.S.”

A reminder: you never want the fiscal health of your country to be compared with that of Italy.

***

Have a nice day, everyone. I’ll see you here tomorrow. 

Bernhard Warner
@BernhardWarner
Bernhard.Warner@Fortune.com

As always, you can write to bullsheet@fortune.com or reply to this email with suggestions and feedback.

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