Global stocks fall for second week in a row as central banks raise interest rates

Global stocks sold off for a second week in a row, driven by concerns about higher interest rates and the health of the economy, while oil prices fell to their last trading levels before Russia invaded Ukraine.

The FTSE All-World Index of global stocks fell 2.1% on Friday, bringing losses for the week to 5%, the worst ever Since June.

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

The moves come at the end of a volatile week dominated by hawkish central bank updates as policymakers try to quell soaring inflation.

The US Federal Reserve led the charge on Wednesday, extending the most aggressive monetary tightening campaign since 1981 with a 0.75 percentage point rate hike for the third time in a row while signaling further gains in the coming months. coming months.

The Bank of England responded to its own inflation crisis by raising interest rates by half a point on Thursday to 2.25, but act less aggressive it was compared with other central banks that helped depreciate the pound. Switzerland’s central bank took comments from the Fed and opted for the more aggressive 0.75 percentage point option in a move aimed at ending the era of negative interest rates in Europe.

Central banks in Indonesia, the Philippines, Taiwan, South Africa and Norway also followed suit this week, underscoring the magnitude of the global trend towards tighter monetary policy.

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

Yields on short-term government bonds rose rapidly on forecasts of higher interest rates, with two-year Treasuries adding 0.07 percentage points on Friday to 4.2%. Yields increase when prices fall.

Futures markets are currently pricing in a peak lending rate of 4.7% next May, compared with current levels of 3% to 3.25%. However, many investors continue to question central banks’ predictions that there will be no rate cuts before the end of 2023.

“The idea that the Fed can hit a high and hold it there for a long time is controversial,” said David Rossmiller, director of portfolio management at Bessemer Trust. “The Fed is signaling that it will complete a perfect landing. . . but there’s a lot of risk around that scenario.”

The $ per barrel line chart shows that oil prices have fallen to their lowest levels since January

Policymakers’ pledge to reduce inflation at all costs has raised fears that their aggressive approach will trigger a global recession.

Goldman Sachs on Thursday cut its year-end forecast for the S&P 500 index to 3,600, implying a further decline of about 2.5% from Friday’s close.

Goldman equity strategist David Kostin said “the majority of equity investors have accepted the view that an unlikely landing scenario is inevitable” for the US economy, while the group Citi’s asset allocation said the Fed had “promised an American recession”.

The dollar, which tends to strengthen in times of uncertainty, extended its recent rally to hit two-decade highs. The dollar index, which measures the currency against a basket of other currencies, rose 1.5%.

The strength of the dollar has raised concerns about an economic slowdown in some developing economies that may have difficulty repaying dollar-denominated debt.

Ayhan Kose, acting vice president for equitable growth, finance and institutions at the World Bank, said emerging and developing markets face a “perfect storm of weak growth”. , very high interest rates and extremely challenging external environment when it comes to trade and foreign direct investment. That’s why we’re worried.”

He added: “This is a global funding shock for them, and that will be accompanied by a very severe drop in demand for their goods. The combination of these can be quite dangerous. “

In the UK, global market turmoil was exacerbated by the reaction to Prime Minister Kwasi Kwarteng’s new Small Budget. The Conservative government’s plan to stimulate growth with £45 billion in debt-financed tax cuts sent the pound falling 3.5% against the dollar to a 37-year low of 1.09 dollars.

Gold-plated production has historically spiked, with 10-year yields up 0.32 percentage points to 3.81%. The policy-sensitive two-year yield rose 0.41 percentage points to 3.91%.

Additional reporting by Kate Duguid in New York

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