Global stocks in steep weekly retreat after central bank rate rises

Global stocks have fallen sharply this week after a trio of major central banks boosted borrowing costs, compounding worries about the health of the global economy.

A FTSE gauge of developed and emerging market shares has dropped 5.5 per cent since the end of last week, which would mark its worst performance since the pandemic-driven ructions of March 2020.

An equity rout on Thursday pushed Wall Street’s S&P 500 gauge down 3.3 per cent, in a sign of the increasingly gloomy market outlook as the Bank of England and the Swiss National Bank followed the Federal Reserve in raising interest rates to tackle soaring inflation.

The week’s steep overall slide came even as shares turned higher on Friday, with Europe’s Stoxx 600 adding 1.3 per cent by the mid-morning. The regional index had lost 2.5 per cent in the previous session. In futures markets, contracts tracking the S&P rose 1.1 per cent.

“Global money is getting more expensive, and it has a way to go yet,” said Robert Carnell, head of Asia-Pacific research at ING. “[US] Equity futures suggest a bounce as we head into the weekend. But that should probably be treated with a pinch of salt.”

The moves during European trading on Friday followed a mixed session in Asia, with Japan’s benchmark Topix index sliding 1.7 per cent on Friday, while China’s CSI 300 gauge climbed 1.4 per cent.

The Swiss National Bank had on Thursday surprised markets with its first rate rise since the lead-up to the global financial crisis in 2007, lifting borrowing costs by half a percentage point after inflation in the country hit a 14-year high last month. The Bank of England joined the trend hours later, with a 0.25 percentage point increase as it warned that UK inflation would climb above 11 per cent this year. A day earlier the Fed had lifted rates by 0.75 percentage points in its biggest such move since 1994.

“The more aggressive line by central banks adds to headwinds for both economic growth and equities,” said Mark Haefele, chief investment officer at UBS Global Wealth Management. “The risks of a recession are rising, while achieving a soft landing for the US economy appears increasingly challenging.”

Indicating traders’ expectations of further equity 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-run average.

In government debt markets, the yield on the benchmark 10-year US Treasury note fell 0.08 percentage points to 3.23 per cent, after sharp swings in recent days as investors adjusted to expectations of higher interest rates and an end to the Fed’s bond-buying programme that pumped billions of dollars into the US economy.

The Fed’s aggressive rate rises have also hit corporate debt markets, with investors pulling $6.6bn out of funds that buy lower-quality, US high-yield bonds in the past week.

Germany’s 10-year Bund yield slipped 0.03 per cent lower to 1.66 per cent, having lurched higher in the previous session after the European Central Bank said this week that it would “accelerate the completion of the design of a new anti-fragmentation instrument” to avoid putting too much pressure on the eurozone’s weaker economies.

The ECB is widely expected to raise rates at its next meeting in July.

In currency markets, the yen weakened as much as 1.8 per cent to ¥134.62 against the dollar after the Bank of Japan diverged from the strategy of aggressive tightening taken by its global peers by leaving policy rates unchanged.

“The Bank of Japan is happy to continue being the ‘odd one out’ among central banks,” said Takayuki Toji, an economist at Sumitomo Mitsui Trust Asset Management. “The BoJ’s analysis suggests that a weaker yen will be beneficial for the Japanese economy providing exchange-rate fluctuations are not too drastic.”


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