It was all meant to fall into place: The world gets vaccinated, and the recovery from the pandemic-doom begins. But soaring energy prices are about to put the crunch on China, and then the rest of the world.

The latest bout of commodity-price surge has taken markets by surprise just as major central banks were planning to find a path out of their stimulus measures.

But the price of commodities may put an end to that sort of wishful thinking on the part of federal treasurers and the Fed.

OIL, GAS RISE

Oil’s climbed to more than $80 a barrel for the first time in three years, natural gas for October delivery traded at the costliest in seven years and the Bloomberg Commodity Spot Index rose to the highest level in a decade. 

The rising cost of power, as well as intermittent power cuts to Chinese factories as Beijing tries to force reduced emissions, could now lead to surging prices for Chinese goods.

Sharp cuts in production across a range of energy-intensive industries in China are now expected to drag growth lower this year, with economists from Goldman Sachs Group Inc. to Morgan Stanley cutting forecasts.

WALL STREET BRACES FOR IMPACT

Investors have been caught by surprise, having spend much of the year planning for a sudden recovery. Wall Street stocks ended sharply lower on Tuesday in a broad sell-off driven by rising U.S. Treasury yields.

It was the S&P 500 index’s biggest one-day percentage drop since May, and the Nasdaq’s largest since March.

The S&P 500 and the Nasdaq Composite index were on track for their largest monthly declines since September 2020.

“The big picture is the sudden surge in the past week of yields, which has led to a ‘sell first, ask questions later’ mentality.”

Ryan Detrick, senior market strategist at LPL Financial

In the US, rising costs for households and companies are hitting confidence while pushing inflation faster than economists had expected only a few months ago. 

In the U.K., consumer confidence fell in September at its sharpest pace since almost a year ago as Britons brace for a looming income squeeze. 

All three major U.S. stock indexes slid nearly 2%, with tech and tech-adjacent stocks weighing heaviest as investors lost their risk appetite.

“(But) there are multiple factors weighing on sentiment today,” Detrick added. “The back-and-forth in Washington with the debt ceiling and the spending bill and potential higher taxes have weighed on overall investor psyche and has led to a pretty good sized sell-off.”

THE SILVER LINING

Thankfully for advanced economies, they have been able to recover from the “COVID recession” better than anticipated a year ago. 

Many officials around the world are still hopeful the current spike in prices will fade without the need for action. 

European Central Bank President Christine Lagarde believes the key challenge for policy makers is that “we do not overreact to transitory supply shocks that have no bearing on the medium term.”