The fight against inflation intensified this week as central banks stepped up their efforts to rein in rising prices, and a global recession could be the price to pay.
Investors were rattled by the biggest rise in US interest rates in nearly three decades, before Switzerland embarked on a shock hike in borrowing costs, capped by the Bank of America’s fifth straight hike. ‘England.
This wave of rate hikes showed that central bankers are deeply concerned about the threat of runaway inflation and ready to plunge the global economy into a slowdown to calm it down.
This ferocity sent global stock markets tumbling to their lowest point in 18 months, and on track for the biggest weekly decline since 2020 as markets entered extremely bearish territory.
The Americas’ benchmark S&P 500 fell into a bear market, 20% off its peak, hammering that markets are in a deep and sustained downturn that could signal a recession.
The more aggressive line from central banks is adding headwinds to economic growth and equities, said Mark Haefele, chief investment officer at UBS Global Wealth Management.
Recession risks are rising, while a soft landing for the US economy looks increasingly difficult.
Currency and bond markets were also shaken this week, while oil and copper prices were hit by fears of a slowdown.
The central bank of the Americas tightened its resolve significantly with a 75 basis point hike on Wednesday, after an unexpected spike in consumer prices in the United States showed that inflation had still not peaked.
Federal Reserve Chairman Jerome Powell denied trying to cause a recession, but said demand needed to be reduced to cool wage increases. Inflation is very painful for people and many are only experiencing it seriously for the first time, he told reporters.
Richard Hodges, manager of the $3.6 billion ($2.9 billion) Nomura Global Dynamic bond fund, said the Fed was orchestrating a recession as it focused solely on bringing U.S. inflation down from its 40-year high of 8.6% in May.
The Fed aims to rebalance the gap between post-pandemic pent-up demand and Russia-Ukraine Covid-impeded supply by reducing demand, said Hodges, who predicted higher borrowing costs would quickly hit the US economy. American economy.
In the latter part of this year, the economy will slow as the US consumer is increasingly squeezed by higher prices, a weak housing market and, to some extent, reduced job certainty, added Hodges.
Switzerland’s central bank, the Swiss National Bank (SNB), sent shockwaves through global markets on Thursday with its first interest rate hike since 2007. The move sparked a surge in the Swiss franc and volatility on currency markets, with the SNB saying it would walk further if necessary.
It was probably the SNB that pushed the camels back, because if the Swiss are worried about inflation, we should all be, said Jeffrey Halley, senior market analyst at financial trading firm Oanda.
Compared to the drama in Washington DC and Zurich, the Bank of England’s quarter-point rate hike on Thursday looked relatively muted. But Threadneedle Street also pledged to act forcefully if needed, prompting many economists to predict borrowers could be hit by a half-point hike in August. It would be the biggest rise in UK interest rates since 1995.
Recession fears pushed the pound to its lowest level in two years this week, leaving the pound down around 10% against the US dollar so far this year.
Only the Bank of Japan bucked the trend. He stuck to his ultra-dovish stance on Friday morning and saw the yen quickly fall 2% to this week’s 24-year low against the US dollar.
A global recession is already ahead, warned Robin Brooks, chief economist at the Institute of International Finance. He said the United States is facing a slowdown in manufacturing and housing.
Despite the fall in stocks this year, stocks may not yet have good value. BlackRock said it was resisting calls to buy the dip because valuations hadn’t really improved, there was a risk of excessive Fed tightening and pressures on profit margins were mounting.
Mihir Kapadia, CEO of Sun Global Investments, said: Stocks look pretty cheap on metrics like price-earnings multiples on a historical basis, but the concern now is that a recession is imminent and earnings are down. the denominator of the P/E ratios can drop quite sharply.
Memories of the euro zone crisis returned this week, as the spread between Italian government debt and safe-haven German government debt hit its highest level since 2014.
Fears that heavily indebted Italy was slipping back into the danger zone prompted the European Central Bank (ECB) to hold an emergency meeting to brainstorm ways to calm the bond market rout.
ECB Vice-President Luis de Guindo said a new anti-crisis tool would address the unwarranted fragmentation of eurozone members’ borrowing costs.
However, the ECB may struggle to control bond spreads while tightening monetary policy. It could also provoke the ire of Germany if it grants public funding to some eurozone countries without conditions.
A greater sense of crisis will be needed before policymakers act to address weaknesses in the fabric of the monetary union, predicted Mark Dowding, CIO of BlueBay Asset Management.
Dowding said confidence in central banks will be needed before markets can stabilize, along with data showing inflation issues have been resolved. He likened the current cycle of rising rates to a visit to the dentist.
From this perspective, it may be better to take the pain quickly and complete the hiking cycle rather than prolong it. That way, the peak may end up being lower than it otherwise would be, he said.
Cryptocurrency investors have certainly felt numb, after Bitcoin plummeted 30% in a week, crypto lending platform Celsius Network halted withdrawals and cryptocurrency hedge fund Three Arrows Capital n failed to meet margin calls from its lenders.
After booming in the easy money era, crypto assets may not have bottomed yet.
We were heading into a cold crypto winter, and we haven’t hit the freezing point yet. Rumors and fears are circulating that bitcoin will fall below $20,000 amid heightened financial market volatility and selloffs in other asset classes, said Dr. Lil Read, senior thematic analyst at GlobalData.
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