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Stock markets diverged on Tuesday as investors fret over the possibility that the US Federal Reserve will move aggressively to combat inflation.
Panic has swept through trading floors since data on Friday showed US consumer prices rising at their fastest pace in decades on surging energy and food costs caused by the Ukraine war and supply chain snarls.
Investors are bracing for the Fed’s interest rate decision on Wednesday as it struggles to walk a fine line between reining in inflation and trying to keep the economy on track.
“While there is no doubt that inflation is a considerable challenge for the US at this point, slamming on the brakes too hard risks pushing the economy off its track,” said Tai Hui, chief market strategy for Asia at JP Morgan Asset Management.
The inflation reading has raised expectations that the US central bank could raise rates by a hefty 75 basis points, higher than its previous 50-point hike.
“The mood has turned very negative since the latter half of last week,” said Craig Erlam, analyst at online trading platform OANDA.
“Now all the talk is about if we’re heading for a recession and how bad it will be,” Erlam said.
Those recession fears sent Wall Street plunging on Monday, with the broad-based S&P 500 stocks index sinking into a bear market after dropping more than 20 percent from its recent peak.
But Wall Street opened higher on Tuesday, with the S&P 500 up 0.2 per cent in early trades while the tech-heavy Nasdaq was flat.
In Europe, Paris and Frankfurt were down in afternoon trades while London steadied. Asian equities mostly fell. Oil prices, which have fuelled the global inflation surge, rose more than two percent, with Brent North Sea Crude, the international benchmark, topping $125 per barrel.
Elsewhere, data on Tuesday confirmed annual inflation in Germany, Europe’s biggest economy, hit a record 7.9 percent in May.
It comes as confidence among German investors remains subdued despite picking up for the second month in a row.
The ZEW institute’s economic expectations index climbed in June by 6.3 points to minus 28 points compared with May, but it is still well below pre-pandemic levels.
“The economy is still exposed to numerous risks, such as the effects of the sanctions against Russia, the unclear pandemic situation in China and the gradual change of course in monetary policy,” said ZEW president Achim Wambach.
Bitcoin steadied on Tuesday after earlier hitting a new 18-month low, as major crypto lender Celsius Network’s freezing of withdrawals and the prospect of sharp US interest rate rises shook the volatile asset class.
Bitcoin clawed its way to positive territory after falling as much as 7.3% to $20,816, its lowest since Dec. 2020. It was last hovering around $22,399.
The world’s largest cryptocurrency fell 15% on Monday, its sharpest one-day drop since March 2020. It has shed about half its value this year and over 20% since Friday alone. Since its record high of $69,000 in November, it has slumped nearly 70%.
Citing “extreme” market conditions, New Jersey-based Celsius said this week that it had frozen withdrawals and transfers between accounts “to stabilise liquidity and operations while we take steps to preserve and protect assets”.
The move, combined with expectations of sharper US Federal Reserve interest rate hikes after high U.S. inflation data last week, pushed the value of the crypto market under $1 trillion for the first time since January 2021.
Most crypto market-watchers were pessimistic on bitcoin’s immediate prospects.
“With the broader risk sentiment firmly negative the sellers have had it all their own way for a few days,” said Richard Usher at crypto firm BCB Group. “It will take a shift in the overall risk sentiment to turn the price around significantly.”
Bitcoin’s slump is likely to have ramifications for other companies exposed to the crypto market.
On Tuesday, cryptocurrency exchange Coinbase Global Inc said it would slash 18% of its workforce, or about 1,100 jobs, as part of efforts to rein in costs amid volatile market conditions.
US software firm MicroStrategy Inc - a major backer of bitcoin - said last month a drop below $21,000 would trigger a demand for extra capital against a loan secured by some of its bitcoin holdings.
That could see it stake more bitcoin against the loan or trigger the sale of some of its vast holdings. The company did not immediately respond to a request for comment outside business hours.
MicroStrategy and Coinbase were down 6.5% and 5.5% respectively in premarket trading on Tuesday as the decline in bitcoin roiled crypto-related stocks. No. 2 token ether also recovered somewhat after losing as much as 10% to $1,075, a fresh 15-month low. Ether is down 75% from its record high of $4,869, hit in November.
Celsius, which had around $11.8 billion in assets, offers interest-bearing products to customers who deposit crypto at its platform. It then lends out coins to earn a return. “The market is now panicking about the impact and contagion if Celsius becomes insolvent,” wrote Singapore fund manager QCP Capital in a note.
Crypto investors were already rattled by the collapse of the TerraUSD and luna tokens in May which were shortly followed by Tether, the world’s largest stablecoin, briefly breaking its 1:1 peg with the dollar.