Fears Of Stagflation Will Weigh on Stock Markets

 | Jul 07, 2021 09:31

The FTSE 100 rallied in three waves [(w),(x),(y)] below 7217, this could be the first indication the rally is complete, as long as 7217 remains intact this scenario exists.

Markets started to pullback yesterday when the US markets re-opened, the decline accelerated after the release of the ISM non-manufacturing PMI. The report was weaker than expected, once again we see a weak report which raises questions about the post pandemic economic recovery.

This triggered a sharp fall in bond yields and oil, if the economy does not recover there will be less demand for oil and interest rates won’t go up. As the price of oil and yields have an influence on the FTSE 100, if oil and yields fall sharply the FTSE 100 will be weak because banks and oil stocks will go down (low yields bearish for banks), these two sectors have a great influence on the FTSE.

What about inflation? If the economy slows inflation will not rise (in theory), however, the creation of money by the central banks creates inflation, therefore it is possible to have inflation and low growth (stagflation). It looks like we are headed for stagflation. In a world of stagflation stock markets will go down. The Elliott wave pattern anticipates a major correction, starting in five waves. So far the pattern is playing out because the top of the rally at 7217 remains intact. In any case the FTSE 100 should underperform, it is a good time to take profits.