The global rout of stock markets, cryptocurrencies and other risky assets has accelerated amid growing fears that runaway inflation, rising interest rates and slowing growth will combine to tip the world into recession.
Stock prices plunged in Asia on Friday at the start of what was expected to be another hot day for investors spooked by the US Federal Reserve’s decision this week to raise interest rates by the widest margin in nearly 30 year.
Other major central banks such as the Bank of England and the Swiss National Bank followed suit – the latter in its first hike in 15 years – prompting economists to revise their growth forecasts downwards.
Stephen Innes of SPI Asset Management in Hong Kong said: “No central banker worth their salt would put their inflation-fighting skills on the line and import higher energy inflation via a weaker currency.
Although the Bank of Japan announced on Friday that it was sticking to its ultra-loose monetary policy, he added that rate hikes elsewhere were a “very worrying signal for equity investors…the global race to the rate hike is far from over.” line”.
Many believe the United States could be in recession by next year, raising the prospect of a wider global recession.
Stocks in the world’s largest economy had 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. JP Morgan analysts said the state of the S&P 500 “implies an 85% probability of a US recession”.
The falls – reflected in the Dow Jones average, the Nasdaq and the tech-heavy UK and European markets – did nothing to boost confidence in Asia-Pacific where the Sydney market was down 2.4% Friday morning, while Tokyo and Hong Kong were both further apart. by 2%.
The cryptocurrency rout also shows no signs of slowing down with bitcoin down almost 10% and ethereum 13% worse. Additionally, the Financial Times reported that Singapore-based crypto hedge fund Three Arrows Capital — which manages $10 billion — failed to meet margin calls this week amid falling crypto stocks.
The outlook is compounded by the likelihood that the conflict in Ukraine will drag on and the West’s economic war on Russia will drive energy prices even higher ahead of winter in the Northern Hemisphere.
“The speed and degree of policy tightening could prove too much for economies to handle, particularly given the commodity price shock currently in play,” economists at Australia’s NAB bank said Friday in a rating. “As a result, the risk of recession for several of the major advanced economies, including the United States, is uncomfortably high.”
David Bassanese, chief economist at Betashares in Sydney, went further and predicted a US recession “within the next 12 months” due to persistent inflation and the Fed’s commitment to hike rates until until the genie of inflation is back in the bottle.
As a result, he said equity markets in the United States fell further. “It looks like there is room for stock markets to continue falling. My base case is that the ultimate peak-to-trough decline for the S&P 500 will be 35%, implying a decline to 3,100 from its closing peak of 4,796 on Jan. 3. It closed at 3,667 points on Thursday.
China’s ongoing coronavirus lockdowns are causing further problems for the global economy. The supply chain upheavals in the world’s second-largest economy that began during the pandemic are set to continue into at least next year thanks to the shutdown of Shanghai and other key regions.
The big picture is that China was already facing problems ranging from decoupling from the west amid geopolitical tensions, a failing and deeply indebted real estate market and uncertainty caused by President Xi Jinping’s crackdown. against big tech companies.
As the West raises rates, the Chinese central bank has cut them and the government in Beijing has launched more stimulus to the economy, although this may not be enough to bail out the global economy as did its massive $4 billion stimulus package 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 little too late to stop inflation in its tracks. One forecast says prices will rise 11% by October and another report says food price increases could exceed 15% in the fall.
Britain’s economy shrank 0.3% in May, figures showed on Monday, and after falling 0.1% it has ‘raised’ the chances of the economy slipping into recession, according to Paul Dales, chief economist of the consultancy firm Capital Economics.
The euro zone is also drinking badly and is torn by doubts on how to handle the divergent real borrowing costs between different countries, which means that Italy has to pay more than Germany despite having the same currency.
The Economist Intelligence Unit (EIU) says in a report that although the United States rebounded faster than other economies from the pandemic crisis, there were signs that consumer spending was weakening. His basic view is that US growth will stop before a recession, but that could be a close call.
“EIU’s main forecast is that economic growth in the United States will slow sharply during 2022 and 2023, due to stubbornly high inflation, rising interest rates and slowing growth elsewhere” , did he declare.
“We expect consumer demand to be resilient enough to avoid an outright recession, thanks in part to the tight labor market and strong household balance sheets. However, that doesn’t mean a recession is completely out of the picture. about.