The global defeat in the markets for stocks, cryptocurrencies and other risky assets has gathered pace amid growing concern that out-of-control inflation, rising interest rates and slowing growth could combine to drive the world into recession.
Stock prices fell in Asia on Friday at the start of what is likely to be another torrid day for investors stunned by the US Federal Reserve’s decision this week to raise interest rates by the widest margin in nearly 30 years.
Other major central banks, such as the Bank of England and the Swiss National Bank, followed suit – the latter at its first high in 15 years – causing economists to scramble to revise their growth forecasts downwards.
Stephen Innes of SPI Asset Management in Hong Kong said: “No central banker worth his weight would put inflation-fighting credentials at risk and import higher energy inflation through a weaker currency.
Despite the Bank of Japan announcing on Friday that it was adhering to its ultra-loose monetary policy, it added that rate hikes elsewhere were a “highly ominous signal to stock market investors… raising rates is nowhere near the end”. line”.
Many believe the United States could be in recession next year, raising the prospect of a broader global recession.
Stocks in the world’s biggest economy have suffered their worst start to the year in 60 years, with the benchmark S&P 500 index down 23% since January after losing another 3.25% on Thursday. Analysts at JP Morgan said the state of the S&P 500 “implies an 85% chance of a U.S. recession.”
The dips – mirrored in the Dow Jones average, the high-tech Nasdaq and the UK and European markets – did nothing to boost confidence in Asia-Pacific, where the Sydney market was down 2.4% early in the morning. Friday, while Tokyo and Hong Kong fell the most. than 2%.
The cryptocurrency route also shows no signs of slowing down with bitcoin down nearly 10% and ethereum 13% worse. Additionally, the Financial Times reported that Singapore-based cryptocurrency hedge fund Three Arrows Capital — which has $10 billion under management — failed to meet margin calls this week amid plummeting cryptocurrency values.
The outlook is compounded by the likelihood that the conflict in Ukraine will linger and the West’s economic war with Russia leading to even higher energy prices ahead of the northern hemisphere winter.
“The speed and degree of tightening of policy could be too much for economies, particularly given the commodity price shock currently at play,” economists at NAB bank in Australia said in a note on Friday. “As a result, the risk of recession for several major advanced economies, including the US, is uncomfortably high.”
David Bassanese, chief economist at Betashares in Sydney, went further and predicted a US recession “in the next 12 months” due to persistent inflation and the Fed’s pledge to raise rates until the inflation genie returns to the bottle.
As a result, he said US equity markets had to fall further. “There seems to be room for equity markets to fall further. My base case is that the maximum decline of the S&P 500 will be 35%, implying a decline to 3,100 from the closing peak of 4,796 on Jan 3.” It closed at 3,667 points on Thursday.
The ongoing coronavirus lockdowns in China are causing more problems for the global economy. The supply chain problems in the world’s second-largest economy that began during the pandemic are expected to continue into the next year at least, thanks to the shutdown of Shanghai and other key regions.
The bigger picture is that China was already grappling with problems ranging from decoupling from the West amid geopolitical tensions, a faltering and highly indebted real estate market, and uncertainty caused by President Xi Jinping’s crackdown on big tech companies.
As the West raises rates, China’s central bank has been cutting them and the Beijing government has been rolling out more stimulus to the economy, although it may not be enough to turn the global economy back on, as its massive $4 stimulus did. trillions after the global financial crisis. from 2008-09.
The Bank of England’s decision to raise rates by 0.25% on Thursday was criticized by some as too late to contain inflation. One forecast says prices will rise 11% through October and another report said food price increases could reach 15% in the fall.
The British economy shrank 0.3% in May, according to data released on Monday, and after a 0.1% drop, “increased” the chances of the economy going into recession, according to Paul Dales, chief economist at the consultancy. Capital Economics. .
The eurozone is also limping and is divided by doubts over how to deal with differing real borrowing costs between different countries, meaning Italy has to pay more than Germany despite having the same currency.
The Economist Intelligence Unit (EIU) says in a report that while the US recovered from the pandemic slump faster than other economies, there were signs that consumer spending was weakening. His basic view is that US growth will not reach a recession, but it could be close.
“The EIU’s main forecast is that economic growth in the US will decelerate sharply throughout 2022 and 2023, due to stubbornly high inflation, rising interest rates and stagnant growth elsewhere,” he said.
“We expect consumer demand to be resilient enough to avoid a full-blown recession, thanks in part to a tight job market and strong household balance sheets. However, that does not mean that a recession is completely out of the question.”