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 1.1 per cent. The regional index had lost 2.5 per cent in the previous session. In futures markets, contracts tracking the S&P rose 0.9 per cent. The Iseq was ahead by 1.34 per cent at 12pm.

“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.”

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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.

[ Fed takes on soaring inflation with largest rate rise 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 0.09 percentage points to 3.21 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. Bond yields fall as their prices rise.

[ ECB to devise new tool to help indebted euro zone members ]

The Fed’s aggressive rate rises have also hit corporate debt markets, with investors pulling $6.6 billion out of funds that buy lower-quality, US high-yield bonds in the week to June 15.

Italian bonds continued to rally after European Central Bank (ECB) president Christine Lagarde told the bloc’s finance ministers that doubting the ECB’s commitment to fighting financial “fragmentation” of the region “would be a serious mistake”.

Italy’s debt has rebounded from a heavy sell-off after the ECB said at an unplanned meeting this week that it would speed up work on a new tool to counter surging borrowing costs in the euro bloc’s weaker economies. Italian 10-year yields fell by 0.2 percentage points to 3.56 per cent on Friday, down from a high of 4.19 per cent earlier in the week.

In currency markets, the yen weakened as much as 2 per cent to ¥134.91 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. — Copyright The Financial Times Limited 2022