World markets plunge on growing recession fears

Stock markets tumbled, the pound crashed against the dollar and oil prices slumped on Friday on growing recession fears after central banks this week ramped up interest rates to fight decades-high inflation.

With price rises showing no solid sign of letting up, monetary policymakers have been forced to go on the offensive, warning that short-term hits to economies are less painful than the long-term effects of not acting.

The Federal Reserve’s decision on Wednesday to lift borrowing costs by 0.75 percentage points for a third successive meeting was followed by a warning that more big rises were in the pipeline and that rates would likely come down only in 2024.

That came along with similar moves by banks in several other countries including Britain, Sweden, Norway, Switzerland, the Philippines and Indonesia -- all pointing to a dark outlook for markets.

“We see this new even-higher-for-longer rate path as associated with a substantially higher likelihood of a hard landing, and so not just unambiguously hawkish but unambiguously bad for risk,” said Krishna Guha, vice-chair of Evercore ISI.

In a sign that recession expectations are rising, the 10-year US Treasury yield jumped to 3.7 per cent, its highest level in a decade, while on Wall Street the S&P 500 has sunk to its weakest level since June and just above its 2022 lows.

The UK 10-year yield struck at an 11-year high at 3.84 per cent Friday.

The pound slumped to $1.1021, the lowest level since 1985, even as the UK government unveiled a tax-cutting budget aimed at driving growth.

In the eurozone, recession fears deepened as data showed its economic activity fell once again in September.

The S&P eurozone PMI dropped to 48.2 in September -- with a score under 50 representing economic contraction.

“A eurozone recession is on the cards as companies report worsening business conditions and intensifying price pressures linked to soaring energy costs,” said Chris Williamson, chief business economist at S&P Global Market Intelligence.

He added that falling UK business activity this month indicates that the British economy is likely already in recession.

Traders were keeping a close eye also on developments following the Japanese finance ministry’s intervention to support the yen, after it hit a new 24-year low of 146 against the dollar.

The first such intervention since 1998 helped strengthen the yen to just above 140.

But analysts warned the move was unlikely to have much long-term impact and the yen remained vulnerable owing to the Bank of Japan’s refusal to tighten policy -- citing a need to boost the economy.

Recession fears also caused oil prices to fall by more than three per cent.

Global bond losses: Global government bond losses are on course for the worst year since 1949 and investor sentiment has plummeted to its lowest since the financial crisis, BofA Global Research said in a note on Friday.

This year’s dramatic bond tumble threatens credit events and a potential liquidation of the world’s most crowded trades, including bets on the dollar that have taken the greenback to multi-year highs against other currencies and bets on US technology stocks, the bank said.

Bond funds recorded outflows of $6.9 billion during the week to Wednesday, while $7.8 billion was removed from equity funds and investors plowed $30.3 billion into cash, BofA said in a research note citing EPFR data.

Investor sentiment is the worst it has been since the 2008 global financial crash, the note said.

US markets appear set for another volatile day. Wall Street futures fell on Friday as investors fretted over the prospect of an economic downturn and a hit to corporate earnings from the US Federal Reserve’s aggressive policy tightening moves to quell inflation. The S&P 500 is down nearly 5% this month and approaching its mid-June bear market lows.

Treasury yields, which move inversely to bond prices, were again rising after hitting their highest level since 2011 on Thursday, with the US benchmark 10-year yield recently around 3.76%.

The bond crash “threatens liquidation of (the) world’s most crowded trades” including long dollar and long US tech, BofA wrote.

BofA said investors faced more inflation, interest rates and recession shocks, adding a bond crash meant that a high in credit spreads and low in stocks had not yet been reached.

Aggressive rate hikes from major central banks to contain inflation, even as growth slows, has unnerved world markets and sparked a fresh surge in bond yields this week.