Global stocks fall sharply on inflation worries

FTSE 100, France’s CAC 40 and Germany’s Xetra Dax hit by declines after Wall Street sell-off in previous session

Global stocks fell sharply and the US dollar and Treasuries rallied as new Chinese lockdowns, fears of aggressive interest rate rises and a slowdown in economic growth pushed investors to search for safety.

The declines followed steep falls on Friday which were sparked by weak economic data and hawkish signals from the Fed about rate rises next month.

London's FTSE 100, France's CAC 40 and Germany's Xetra Dax were all hit by declines. Europe's Stoxx 600 fell 2.1 per cent in morning trading, putting the regional gauge on track for its worst daily fall since early March as traders brushed off a decisive election victory for French president Emmanuel Macron.

Trading

Futures trading implied Wall Street’s S&P 500 share index would drop a further 0.9 per cent in early New York dealings. Brent crude, the oil benchmark, dropped 4.3 per cent to $102 a barrel.

“As in previous times when markets have cracked, a lot of headwinds are coming together,” said Neil Birrell, chief investment officer at Premier Miton Investors, “although the China situation looks like the big catalyst today.”

“It is hard to find good news anywhere and I can find good reasons to be negative on almost every asset class,” he added,

Mainland China’s CSI 300 share index closed 4.9 per cent lower as panic buying gripped Beijing, where residents are braced for harsh social restrictions similar to those implemented in Shanghai. The renminbi fell 1 per cent against the dollar. Japan’s Nikkei 225 share index dropped 1.9 per cent.

“The week is starting with a firmly negative tone in global markets,” ING strategists commented in a note to clients, citing central banks tightening monetary policy, Russia and Ukraine “moving further away from a diplomatic solution” and “China’s Covid crisis”.

Inflation

Last week Fed chair Jay Powell said a 0.5 percentage point interest rate rise was "on the table" in an effort to combat soaring inflation.

Citi global markets strategist Matt King also cited a plan by the Fed to shrink its $9 trillion (€8.32 trillion) balance sheet, which swelled during the Covid crisis as the US central bank conducted unlimited bond purchases to inject liquidity into the financial system, as a reason for “the sudden shift weaker in markets.”

Mr King added: “Unfortunately it’s hard to say whether this immediate liquidity drainage is now fully priced in.”

The dollar index, which measures the US currency against six others including the euro and the yen, rose 0.4 per cent to its highest point since late March 2020. The euro declined 0.6 per cent against the dollar to $1.07. Sterling lost 0.9 per cent to $1.27.

Despite surging inflation and rate rise expectations, there was heavy buying of US Treasuries on Monday as traders bought up the low-risk assets in anticipation of an economic slowdown.

Price

The yield on the benchmark 10-year Treasury note dropped 0.08 percentage points to 2.82 per cent as the price of the debt instrument rose, while the policy-sensitive two-year Treasury yield fell more than 0.1 percentage point to just 2.61 per cent.

The commerce department on Thursday is forecast to report that the US economy grew at an annualised rate of 1 per cent in the first quarter, marking the weakest growth since a Covid lockdown-induced recession in 2020.

US Big Tech groups Amazon, Facebook owner Meta and Apple also release quarterly earnings this week, after streaming group Netflix shocked investors by reporting it was losing subscribers for the first time in a decade.

– Copyright The Financial Times Limited 2022

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