Global markets fell sharply yesterday after a series of interest rate rises from global central banks rekindled fears that aggressive policy tightening could push economies into recession.
After a relief rally on Wednesday when investors welcomed the US Federal Reserve’s aggressive move to raise rates by 75 basis points — its biggest since 1994 — two further rounds of policy tightening in the UK and Switzerland led investors to focus on the prospect that economic growth could slow dramatically, damaging consumer confidence as the cost of borrowing rises.
In London, the FTSE 100 index of leading companies suffered its worst day since early March with a fall of 3.1 per cent to 7,044.98. It is down 7.4 per cent on the month.
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Stock markets in Frankfurt, Paris and Berlin all fell by more than 2 per cent. On Wall Street the midweek rally was followed by a strong sell-off. The S&P 500, regarded as a benchmark of American corporate health, fell 3.3 per cent to 3,666.77, pushing the index further into correction territory, down 23.6 per cent from its record high in January. The Nasdaq, home to big US technology stocks, fell 4.1 per cent to 10,646.10, its lowest level since September 2020.
“The mood in markets has turned much more cautious after the shockingly high US inflation number last week as investors finally accept that inflation comes above market and growth considerations for central banks,” Emmanuel Cau, Barclays’ head of European equity strategy, said.
Investors are worried that by aggressively raising interest rates to try to rein in soaring inflation, central banks will end up pushing an already-fragile global economy into recession.
In London, those worries hit sectors such as housebuilders and retailers, whose profits are especially reliant on a confident consumer and healthy economy.
Yesterday the Bank of England lifted interest rates by 25 basis points to a 13-year high of 1.25 per cent, while the Swiss National Bank increased its rates for the first time since 2007, by 50 basis points to -0.25 per cent. On Wednesday night, the US Federal Reserve pulled the trigger on a 75 basis point increase.
Stock markets do not tend to react well to higher interest rates as they make borrowing more expensive for companies and consumers and reduce the relative appeal of owning equities over bonds.
That is because yields on government bonds, which move inversely to bond prices, generally rise in response to higher rates as investors demand a better return.
Yields on 10-year UK government bonds, known as gilts, nudged back up above 2.5 per cent yesterday. Only a few months ago they were barely above 1 per cent. Similarly, the yield on a 10-year US Treasury has doubled in 2022 to 3.35 per cent.
Recession fears have also started to affect commodities, demand for which usually tracks the health of the wider economy.
Fearing a drop-off in demand as global growth stalls, the price of a barrel of Brent crude oil dipped another 0.5 per cent to a three-week low of $118. Copper hit a one-month low of $9,022 a tonne having fallen by more than 2 per cent on Thursday, while aluminium fell 3 per cent to $2,511 a tonne — its cheapest since early November.
The gold price, however, perked up to $1,844 an ounce, having struck a four-month low earlier. The yellow metal has been hampered by a stronger dollar, which makes it more expensive to foreign buyers, as well as surging bond yields, which increase the opportunity cost of holding assets such as gold, which do not pay any interest or dividends.
Having initially fallen in the wake of the Bank of England’s latest rate rise, the pound clawed back some of its recent losses against the dollar as traders jumped on hawkish comments from policymakers.
Sterling rose 1.3 per cent against the dollar to $1.234, while against the euro it improved 0.5 per cent to €1.172. As a reminder, the pound began the year at $1.35 and €1.19, respectively.
Bitcoin has fared even worse than sterling this year and it fell another 3 per cent on Thursday to below $21,000 for the first time since the run-up to Christmas 2020. The digital currency, down 54 per cent so far this year, has been caught up in the “crypto winter”, which has seen investors dump risky assets.