Since Russia invaded Ukraine, world supplies have taken a wild turn. On Friday, they closed with their steepest weekly decline since the March 2020 pandemic, as investors worried that tighter monetary policies by inflation-fighting central banks could hurt economic growth.
After a week of vigorous moves between asset classes, risky assets underperformed in more than two years as leading central banks doubled their policies to contain runaway inflation, allaying investors’ fears of a global economic slowdown.
Those market movements underline recession risks.
Also gaining momentum in recent weeks are bets that the age-old driver of the recession, the central banks, could once again be the reason.
India’s 30-stock S&P BSE Sensex and the broader NSE Nifty suffered their worst week since May 2020. Both hit lows for more than a year in their sixth consecutive loss session, with blue-chip indices recording losses of around 5.5 percent each. for the week.
The magnitude of the meltdown is comparable to the financial markets’ response to fears of a global economic recession due to the pandemic in 2020, which was more or less accurate.
The S&P 500 fell 5.8 percent this week, the biggest drop since the third week of 2020.
“Inflation, the war and lockdowns in China have derailed the global recovery,” Bank of America economists said in a note to customers, adding they see a 40 percent chance of a recession in the United States next year as the U.S. Fed continues to raise interest rates. †
“We expect GDP growth to slow to near zero, inflation to approach 3% and the Fed to raise interest rates above 4%.”
Expectations about how much major central banks will have to tighten their policies to fight runaway inflation have risen, shaking global markets and shaking investors.
The dominant theme influencing equity markets worldwide is the synchronized global monetary tightening and the ensuing fear of an economic slowdown. Indeed, investors have remained uncertain about future economic growth amid a rise in global lending rates.
The biggest US rate hike since 1994, the first Swiss move in 15 years, the fifth hike in UK interest rates since December and a move by the European Central Bank to bolster the debt burden in the South ahead of future hikes.
Investors are bracing for more daring and, in some cases, unprecedented tightening moves.
“If a central bank doesn’t act aggressively, returns and the price of risk will stand in the way of rate hikes going forward,” said NatWest Markets strategist John Briggs.
“Markets may be constantly adjusting to the outlook for higher global policy rates… as the central bank’s global policy momentum is all one-way.”
Fed futures on Friday estimate a 44.6 percent chance that U.S. interest rates will reach 3.5 percent by the end of the year, from current levels of 1.58 percent, according to the CME’s FedWatch. That chance was less than 1 percent a week ago.
Growing hawkishness has fueled wild moves in global markets as central banks rush to unwind the monetary support measures that have helped drive asset prices soar for years.
Concerns that the Fed’s aggressive rate hike path will push the economy into recession had grown lately, slamming stocks — which hit a bear market earlier this week as the S&P 500 plunged from its record high to more than 20 percent. extended. The index’s 6 percent drop is the worst weekly drop since March 2020.
Shifting interest rate expectations have also led to wide swings in bond and currency markets.
Reuters reported that the ICE BofAML MOVE Index, which tracks treasury volatility, is at its highest level since March 2020, while the Deutsche Bank Currency Volatility Index, which measures expectations for fluctuations in FX, has also moved higher this year.
According to BofA Global Research, global central banks have already raised interest rates 124 times this year, compared to 101 hikes for all of 2021 and six in 2020.
Tighter monetary policy follows the worst inflation many countries have seen in decades. For example, US consumer prices rose at the fastest rate since May 1981.
Higher rates, rising oil prices and market turmoil are all contributing to the tightest financial conditions since 2009, according to a Goldman Sachs index that uses metrics such as exchange rates, stock movements and borrowing costs to compile the most widely used indices for financial conditions.
Tighter financial conditions may cause companies and households to curtail their spending plans, saving and investing. According to Goldman, a 100 basis point tightening in terms of conditions will slow growth by one percentage point next year.
“The more aggressive stance of central banks is adding to headwinds for both economic growth and equities,” Mark Haefele, chief investment officer at UBS Global Wealth Management, told Reuters.
Recession risks are mounting, while achieving a soft landing for the US economy becomes increasingly challenging.