Sujata Rao gives a glimpse at what lies ahead.

How do you combat inflation? Inflation? Stagflation? Whatever the outcome, the markets seem scared. Stocks around the world are at their lowest levels since July. They’re also down 6% from record highs a month ago.

Oil prices have risen to $80 per barrel, a new record high for the year. This is because OPEC+ producers remained true to their production policy despite being under pressure to increase oil. Low European inventories and record high gasoline prices are indicating a harsh winter for small and large businesses and consumers alike.

China’s problems in the property sector and an idling factory power shortage pose threats to economic growth. Developer Fantasia is now joining Evergrande and has missed a coupon payment. Borrowing costs for junk-rated Chinese companies have also soared.

Add to that the possibility of default in America’s largest economy. According to Moody’s (NYSE :), this could lead to the U.S. economy shrinking by nearly 4% and removing 6 million jobs. It also raises unemployment to 9%.

The U.S. 10-year yields on bonds is still below its three-month record, but it’s driving up short-term borrowing costs. In fact, one-month Treasury bill yields remain at their highest levels since October.

Credit default swaps in the United States, which derivatives investors use to protect their exposure, are at an all-time high. They have reached a new one year record.

Here’s a picture of Spiking credit default Swaps

https://fingfx.thomsonreuters.com/gfx/mkt/egvbkydkkpq/Credit%20default%20swaps.png

Global financing conditions will be tightened as a result of rising energy costs and a near-one-year-high dollar. However, more central banks are beginning to withdraw pandemic-time stimuli.

From next month, the Federal Reserve is almost certain to begin unwinding stimulus. New Zealand will likely become the second industrialized country to increase rates after Norway.

Wall Street is trying to recoup some losses that it suffered Wednesday, when the Nasdaq fell more than 2 percent. The futures point higher and European shares opened more firm, despite falling to their one-month lowests.

There are key developments which should give more direction to the markets Tuesday

–The Reserve Bank of Australia held their monetary policy unchanged in its Tuesday meeting, as expected.

Japan’s services industry activity shrank in September for the twenty-first consecutive month

-UK passenger cars data

-BOE’s Dave Ramsden speaks

-ECB board member Fernandez Bollo speaks

-Fed speakers: Richmond Fed’s Thomas Barkin, Vice Chair for supervision Randal Quarles

-Euro zone PPI

-Romania central bank meets

-U.S. trade balance/ISM PMIs