Global markets fall sharply on worries about rates, economy

DAMIAN J. TROISE and ALEX VEIGAO are AP business writers

Stocks around the world tumbled on Friday on fresh signs that the global economy is weakening as central banks piled the pressure further with further interest rate hikes.

The S&P 500 fell 2% in afternoon trading, adding a dismal cap to what was already a tough week. This is close to the lowest point of the year in mid-June.

European stocks fell just as sharply or more after preliminary data showed business activity fell for the worst month since early 2021. The pressure has increased with a new plan announced in London reduce taxeswhich sent UK yields soaring because it could ultimately force the central bank to raise rates even more sharply.

The Federal Reserve System and other central banks Interest rates around the world have been aggressively raised this week in hopes of reducing high inflation, with more hikes on the horizon. But such moves are also holding back their economies, threatening recession as growth slows around the world. In addition to disappointing data on business activity in Europe on Friday, a separate report said that activity in the US also continued to contract, although not as much as in previous months.

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“Financial markets are now fully on board with the Fed’s tough message that there will be no retreat from the fight against inflation,” Douglas Porter, chief economist at BMO Capital Markets, wrote in a research note.

Crude oil prices fell to their lowest level since the beginning of this year on fears that a weaker global economy will burn less fuel. Cryptocurrency prices have also fallen sharply because higher interest rates tend to hit investments that appear to be the most expensive or risky the hardest.

Even gold has fallen amid the global rout as higher-yielding bonds make non-interest-paying investments less attractive. Meanwhile the rate of the US dollar rose sharply against other currencies. This could hurt the profits of American companies with large businesses abroad and put financial pressure on much of the developing world.

The Dow Jones Industrial Average was down 505 points, or 1.7%, at 29,572, while the Nasdaq was down 1.9% as of 3:43 p.m. ET. Shares of smaller companies fared even worse. The Russell 2000 fell 3%. U.S. crude oil prices fell 5.7% and weighed heavily on energy stocks.

More than 90% of stocks in the S&P 500 were in the red, with technology companies, retailers and banks holding the largest weights in the benchmark index. The major indexes are heading for their fifth weekly loss in the past six weeks.

The Federal Reserve on Wednesday raised the key rate, which affects many consumer and business loans, to a range of 3% to 3.25%. At the beginning of the year, it was almost at zero level. The Fed also released a forecast that its key rate could reach 4.4% by the end of the year, a full point higher than it had predicted in June.

Treasury yields rose to multi-year highs as interest rates rose. The yield on the 2-year Treasury note, which typically tracks expectations for action by the Federal Reserve, rose to 4.19% from 4.12% late Thursday. It is trading at its highest level since 2007. The yield on the 10-year Treasury note, which affects mortgage rates, fell to 3.68% from 3.71%.

Higher rates mean Goldman Sachs strategists say most of their clients now see a “hard landing” that drags the economy down sharply as inevitable. The only question for them is the timing, scale and duration of the potential downturn.

Higher interest rates hurt all types of investments, but stocks can hold steady as long as corporate earnings grow strongly. The problem is that many analysts are starting to lower their forecasts for future earnings because of higher rates and worries about a possible recession.

“Market psychology is increasingly shifting from concerns about inflation to concerns that, at the very least, corporate earnings will decline as economic growth slows demand,” said Quincy Crosby, chief global strategist at LPL Financial.

In the US, the labor market remains extremely strong, and many analysts believe that the economy grew in the summer quarter after contracting in the first six months of the year. But encouraging signs also suggest the Fed may have to raise rates even higher to get the cooling needed to lower inflation.

Some key sectors of the economy are already weakening. Mortgage rates hit a 14-year high, leading to a 20% drop in existing home sales last year. But other areas that do best when rates are low are also suffering.

Meanwhile, Europe’s already fragile economy is struggling with the fallout from war on the eastern front following Russia’s invasion of Ukraine. The European Central Bank is raising a key interest rate to fight inflation, even as the region’s economy is already expected to slide into recession. And in Asia, China’s economy is struggling with still-draconian measures to contain the spread of COVID, which are also hurting business.

While Friday’s economic reports were disappointing, few on Wall Street saw them as enough to persuade the Fed and other central banks to soften their stance on rate hikes. As such, they only fueled fears that rates will continue to rise amid an already sluggish economy.

Economics writer Christopher Rugaber and business writers Joe McDonald and Matt Ott contributed to this report.

Copyright 2022 The Associated Press. All rights reserved. This material may not be published, broadcast, copied or distributed without permission.

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