Global stocks fell sharply this week after a trio of major central banks raised borrowing costs, heightening concerns about the health of the global economy.
A FTSE indicator of developed and emerging market shares has fallen 5.6% since the end of last week, which would mark its worst performance since the pandemic-induced turmoil of March 2020.
A rout in stocks on Thursday sent Wall Street’s S&P 500 gauge down 3.3%, a sign of an increasingly bleak market outlook as the Bank of England and Swiss National Bank followed the Federal Reserve in raising interest rates to fight against soaring inflation.
The week’s sharp overall decline came even as equity markets rose on Friday, with futures trailing the S&P adding 0.5%. In Europe, the regional Stoxx 600 rose 0.9%, after losing 2.5% in the previous session.
Some analysts say the fall in European stocks has bottomed out, with Bank of America upping its view of the Stoxx from ‘negative’ to ‘neutral’ on the assumption that a sharp drop from the all-time high in January has priced in the one of the bad macroeconomic news he expects to materialize. “We expect central bankers’ attention to shift from inflation to weakening growth,” the Wall Street bank said.
The SNB surprised markets on Thursday with its first rate hike since the 2007 global financial crisis, raising borrowing costs by half a percentage point after inflation in the country hit a 14-year high last month. The BoE joined the trend hours later, rising 0.25 percentage points as it warned UK inflation would climb above 11% this year. A day earlier, the Fed raised rates by 0.75 percentage points in its largest since 1994.
“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. “The risks of a recession are growing, while achieving a soft landing for the US economy looks increasingly difficult.”
Indicating traders’ anticipation of further stock market volatility to come, the Vix – often referred to as Wall Street’s “fear gauge” – registered a reading of 32 on Friday, well above its long-term average. .
In government debt markets, the yield on the benchmark 10-year US Treasury note fell 0.1 percentage point to 3.2%, after swinging sharply in recent days as investors adjusted to expectations. higher interest rates and the end of the Fed’s bond buying program. which injected billions of dollars into the American economy. Bond yields fall as their prices rise.
Aggressive Fed rate hikes have also hit corporate debt markets, with investors pulling $6.6 billion out of funds buying lower-quality US high-yield bonds in the week to June 15. .
Meanwhile, Italian bonds continued to rally after European Central Bank President Christine Lagarde told the bloc’s finance ministers that doubting the central bank’s commitment to tackling “fragmentation” financial situation in the region “would be a serious mistake”.
Italian debt rebounded from a sharp selloff after the ECB said at an unscheduled meeting this week that it would accelerate work on a new tool to counter soaring borrowing costs in the bloc’s weaker economies euro. Italian 10-year yields fell 0.16 percentage points to 3.6% on Friday from a high of 4.19% earlier in the week.
In currency markets, the yen weakened as much as 2% to ¥134.91 against the dollar after the Bank of Japan deviated from the aggressive tightening strategy adopted by its global peers by leaving rates directors unchanged.
Additional reporting by Tommy Stubbington