Global equities sold off for the second straight week, weighed down by concerns over higher interest rates and the health of the economy, while oil prices fell to levels last traded before Russia invaded Ukraine.
The FTSE All-World Index of global equities fell 2.1 percent on Friday, bringing its loss for the week to 5 percent, the worst since June.
Wall Street’s benchmark stock index, the S&P 500, ended the week down 4.6 percent, while the tech-dominated Nasdaq Composite slipped 4.16 percent. The European Stoxx 600 posted a 2.3 percent daily loss on Friday to officially enter “bear market” territory — typically defined as a decline of 20 percent or more from a recent high.
The moves came at the end of a turbulent week dominated by hawkish updates from central banks as policymakers try to stem rising inflation.
Leading the charge on Wednesday, the US Federal Reserve extended its most aggressive monetary tightening campaign since 1981 with a third straight rate hike of 0.75 percentage points and announced more rate hikes in the coming months.
The Bank of England responded to its own inflationary woes by raising interest rates by half a point to 2.25 on Thursday, but the less aggressive action it took compared to central bank peers helped undermine sterling. Taking cues from the Fed, the Swiss central bank opted for the more aggressive 0.75 percentage point option, ending the era of negative interest rates in Europe.
Central bankers in Indonesia, the Philippines, Taiwan, South Africa and Norway also followed suit this week, underscoring the magnitude of the global shift towards tighter monetary policy.
Concerns about the economic outlook were also reflected in oil prices, with international benchmark Brent crude falling 4.8 percent to $86.15 a barrel – its lowest level since January.
Short-dated Treasury yields rose quickly in response to higher interest rate forecasts, with the two-year Treasury yield climbing another 0.07 percentage point to 4.2 percent on Friday. Yields rise when prices fall.
Futures markets are now pricing in a top Fed funds rate of 4.7 percent through next May, compared to the current range of 3 percent to 3.25 percent. However, many investors continue to question central bankers’ forecasts of no rate cuts before the end of 2023.
“The idea that the Fed could plateau and stay there for a long time is controversial,” said David Rossmiller, head of portfolio management at Bessemer Trust. “The Fed is signaling that it will achieve a perfect landing. . . but this scenario carries many risks.”
Policymakers’ commitment to bringing down inflation at all costs has sparked growing fears that their aggressive approach will cause a global recession.
Goldman Sachs on Thursday lowered its year-end guidance for the S&P 500 Index to 3,600, a further drop of about 2.5 percent from Friday’s close.
Goldman equity strategist David Kostin said “a majority of equity investors believe a hard landing scenario is inevitable” for the US economy, while Citi’s asset allocation team said the Fed has “as good as a US -Recession promised”.
The dollar, which tends to strengthen in uncertain times, extended its recent rally and hit a new two-decade high. The dollar index, which measures the currency against a basket of peers, rose 1.5 percent.
The dollar’s strength has fueled fears of an economic slowdown in some developing countries, which may struggle to service dollar-denominated debt.
Ayhan Kose, acting vice president for equitable growth, finance and institutions at the World Bank, said emerging and developing markets were facing a “perfect storm with weak growth, very high interest rates and a very challenging external environment when it comes to trade and abroad direct investment. That’s why we’re worried.”
He added: “This is a global funding shock for them and that will come with a very serious drop in demand for their goods. The combination of these could be quite deadly.”
In the UK, global market turmoil was exacerbated by the reaction to new Chancellor Kwasi Kwarteng’s mini-budget. The Conservative government’s plan to boost growth with debt-financed £45 billion in tax cuts caused the pound to fall 3.5 percent against the dollar to a 37-year low of $1.09.
Gilt yields rose by historic levels, with the 10-year yield rising 0.32 percentage points to 3.81 percent. The policy-relevant two-year yield rose 0.41 percentage points to 3.91 percent.
Additional reporting by Kate Duguid in New York