The fight against inflation intensified this week as central banks intensified their efforts to cool price hikes, and a global recession may be the price we pay.
Investors recovered from the biggest rise in US interest rates in nearly three decades, before Switzerland piled up with a sudden increase in borrowing costs, led by the fifth straight hike from Bank of England.
This wave of interest rate hikes showed that central bankers are deeply concerned about the threat of severe inflation, and are ready to plunge the global economy into deflation to cool it down.
This optimism drove global stock markets to their lowest level in more than 18 months, in the biggest weekly drop since March 2020 as markets entered “extremely bearish” territory.
The benchmark Standard & Poor’s 500 index in America has fallen into a bear market, falling 20 percent from its peak, hitting markets in a severe and persistent slump that could signal a recession.
“The more aggressive streak by central banks is adding to the headwinds for both economic growth and stocks,” said Mark Heffel, chief investment officer at UBS Global Wealth Management.
“Recession risks are rising, while achieving a soft landing for the US economy appears to be an increasing challenge.”
The currency and bond markets were also affected this week, while oil and copper prices were affected by slowdown fears.
The US central bank has greatly tightened its determination with 75 basis points on WednesdayAfter an unexpected rise in US consumer prices showed that inflation has not yet peaked.
Federal Reserve Chairman Jerome Powell has denied trying to trigger a recession, but said demand must be curtailed to cool wage increases. inflation He told reporters that it is “very painful for people” and many are only seriously experiencing it for the first time.
Richard Hodges, director of the $3.6 billion (£2.9 billion) Nomura Global Dynamics bond fund, said the Fed was running a recession as it focused solely on bringing down US inflation from a 40-year high of 8.6% in May.
Hodges said the Fed aims to rebalance post-pandemic and pent-up demand and between Russia and Ukraine, which have hampered supply by reducing demand, and predicted that higher borrowing costs would quickly hurt the US economy.
“In the later part of this year, the economy will slow as the US consumer becomes increasingly stressed by higher prices, a weak housing market and, to some extent, lower employment certainty,” Hodges added.
The Swiss central bank, the Swiss National Bank (SNB), sent shock waves into global markets on Thursday with its first rate hike since 2007. The measure sparked a rally in the Swiss franc, and volatility in foreign exchange markets, with the Swiss National Bank saying it would rise further. if it is necessary.
“Maybe the SNB broke the camel’s back, because if the Swiss are worried about inflation, we should all be,” said Jeffrey Halley, chief market analyst at financial trading firm Oanda.
Compared to the drama in Washington, D.C. and Zurich, The Bank of England’s quarter-point rate hike on Thursday looked relatively weak. But Threadneedle Street has also vowed to act “aggressively” if necessary, leading many economists to predict borrowers could strike with a half-point lift in August. This would be the largest rise in interest rates in the UK since 1995.
Recession fears have pushed sterling to a two-year low this week, leaving sterling down about 10% against the US dollar so far this year.
Only the Bank of Japan bucked this trend. It stuck to its ultra-loose stance on Friday morning – and saw the yen immediately drop 2% towards a 24-year low against the US dollar.
Robin Brooks, chief economist at the Institute of International Finance, warned that a global recession is already coming. He said the United States was facing a decline in manufacturing and housing.
Despite the downturn in stocks this year, the stocks may not be a good value yet. BlackRock said it was resisting calls to “buy the dip” because valuations haven’t really improved, there was a risk of the Fed over-tightening, and profit margin pressures were building.
Mihir Kapadia, CEO of Sun Global Investments, said: “Stocks look very cheap in measures such as price and earnings multiples on a historical basis, but the concern now is that a recession is imminent and earnings that are the denominator in the P/E ratios could fall sharply.
Memories of the eurozone crisis resurfaced again this week, as the gap between Italian and German government debt reached its highest level since 2014.
Fears that debt-laden Italy was heading into the ‘danger zone’ pushed European Central Bank (European Central Bank) to hold an emergency meeting to find ways to calm the bond market rout.
European Central Bank Vice President Luis de Guindo said a new anti-crisis tool would deal with “unexplained fragmentation” in the borrowing costs of eurozone members.
With that said, the European Central Bank may struggle to keep bond spreads in check while also tightening monetary policy. It could also irritate Germany if it provided government funding to some eurozone countries without conditions.
“More sense of the crisis will be needed before policymakers act to address weaknesses within the fabric of the monetary union,” said Mark Dowding, CIO at BlueBay Asset Management.
Dowding said confidence in central banks will be needed before markets stabilize, along with data showing inflation concerns have been addressed. Compare your current rate hike cycle to a trip to the dentist.
“From this point of view, it may be better to take the pain quickly and get the hiking cycle done, than to take it off. In this way, the top may end up being lower than it might otherwise be.”
Crypto investors surely felt numb, after bitcoin plummeted 30% in a week, Crypto lending platform Celsius Network has suspended withdrawalsCryptocurrency hedge fund Three Arrows Capital is said to have failed to meet margin requests from lenders.
Having boomed during the days of easy money, crypto assets may not have hit bottom yet.
“We are entering a cold winter, and we haven’t reached the freezing point yet. Rumors and concerns are swirling about Bitcoin dropping below $20,000 amid broader volatility in financial markets and sell-offs in other asset classes,” said Dr. Lil Reed, senior analyst at GlobalData.