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Global stocks fall for second straight week as central banks hike rates

By on September 23, 2022 0

Global stocks sold off for a second straight week, weighed down by concerns over rising interest rates and the health of the economy, while oil prices fell to levels last traded before the invasion of Ukraine by Russia.

The FTSE All-World index of global stocks fell 2.1% on Friday, taking its loss for the week to 5%, the worst since June.

Wall Street’s benchmark S&P 500 stock index ended the week down 4.6%, while the tech-dominated Nasdaq Composite lost 4.16%. The European Stoxx 600 posted a daily loss of 2.3% on Friday to officially enter “bear market” territory – generally defined as having fallen 20% or more from a recent high.

The measures came at the end of a tumultuous week dominated by hawkish updates from the central bank as policymakers try to stamp out soaring inflation.

The U.S. Federal Reserve led the charge on Wednesday, extending its most aggressive campaign of monetary policy tightening since 1981 with a third consecutive 0.75 percentage point hike in interest rates while signaling further hikes in the months coming.

The Bank of England responded to its own inflation crisis by raising rates by half a point on Thursday to 2.25, but the less aggressive action it took compared to its central bank counterparts helped undermine the pound sterling. The Swiss central bank took inspiration from the Fed and opted for the more aggressive option of 0.75 percentage points, which ended the era of negative rates in Europe.

Central bankers in Indonesia, the Philippines, Taiwan, South Africa and Norway also followed suit this week, underscoring the enormity of the global pivot to tighter monetary policy.

Worries about the economic outlook were also reflected in oil prices, with international benchmark Brent crude falling 4.8% to $86.15 a barrel, its lowest level since January.

Yields on short-term government bonds rose rapidly in response to higher rate expectations, with the two-year Treasury climbing another 0.07 percentage point on Friday to 4.2%. Yields rise when prices fall.

Futures markets are now forecasting a peak federal funds rate of 4.7% by next May, from the current range of 3% to 3.25%. However, many investors continue to question central bankers’ predictions that there will be no interest rate cuts before the end of 2023.

“The idea that the Fed can plateau and hold it for a long time is debatable,” said David Rossmiller, head of portfolio management at Bessemer Trust. “The Fed is signaling it’s going to make a perfect landing. . . but there are a lot of risks around this scenario.

Policymakers’ pledge to bring inflation down at all costs has raised concerns that their aggressive approach will lead to a global recession.

Goldman Sachs on Thursday lowered its year-end forecast for the S&P 500 to 3,600, implying another decline of around 2.5% from Friday’s closing level.

Goldman equity strategist David Kostin said “a majority of equity investors have taken the view that a hard landing scenario is inevitable” for the US economy, while the team Citi Asset Allocation said the Fed had “almost promised a US recession”.

The dollar, which tends to strengthen in times of uncertainty, extended its recent rally to hit a new high in two decades. The dollar index, which measures the currency against a basket of peers, rose 1.5%.

The strong dollar has heightened fears of an economic slowdown in some developing economies that may struggle to service dollar-denominated debt.

Ayhan Kose, acting vice president for equitable growth, finance and institutions at the World Bank, said emerging and developing markets are facing a “perfect storm with weak growth, very high interest rates and an extremely difficult external environment in terms of trade and foreign relations”. direct investment. This is why we are worried. »

He added: “This is a global financial shock for them, and it will be accompanied by a very sharp drop in demand for their products. The combination of these could be pretty deadly.

In the UK, the global market tumult was exacerbated by the response to new Chancellor Kwasi Kwarteng’s mini-budget. The Conservative government’s plan to spur growth with £45bn of debt-funded tax cuts sent the pound down 3.5% against the dollar to a 37-year low of $1.09 .

Yields on gilts jumped by historic magnitude, with the 10-year yield climbing 0.32 percentage points to 3.81%. The policy-sensitive two-year yield jumped 0.41 percentage points to 3.91%.

Additional reporting by Kate Duguid in New York