World stocks have gone through wild gyrations since Russia invaded Ukraine. On Friday, they closed out with their steepest weekly slide since the pandemic meltdown of March 2020, as investors worried that tighter monetary policy by inflation-fighting central banks could damage economic growth.
After a week of punchy moves across asset classes, risk assets suffered their worst performance in over two years as leading central banks have doubled down on tighter policy to tame runaway inflation, setting investors’ fears of a global economic slowdown.
Those market moves underscore disaster risks.
What has also gained traction in recent weeks is bets that the age-old driver of recession, central banks, would be the reason again.
India’s 30-stock S&P BSE Sensex and the broader NSE Nifty suffered their worst week since May 2020. Both touched more than one-year lows in their sixth straight session of losses, with the blue-chip indexes logging losses of around 5.5 per cent each for the week.
The magnitude of the meltdown is similar to financial markets’ reaction to the fears of a global economic recession from the pandemic in 2020, which was more or less accurate.
For the week, the S&P 500 dropped 5.8 per cent, its biggest fall since the third week of 2020.
“Inflation, the war and lockdowns in China have derailed the global recovery,” economists at Bank of America said in a note to clients, adding they see a 40 percent chance of a recession in the United States next year as the Fed keeps raising rates .
“We look for GDP growth to slow to almost zero, inflation to settle at around 3 per cent and the Fed to hike rates above 4 per cent.”
Expectations for how significantly major central banks need to tighten policy to fight runaway inflation have risen, shaking up global markets and rattling investors.
The dominant theme impacting equity markets globally is the synchronized global monetary tightening and the consequent fears of economic slowdown. Indeed, investors have remained uncertain about future economic growth on a hike in global borrowing rates.
The biggest US rate rise since 1994, the first such Swiss move in 15 years, the fifth rise in British rates since December and a move by the European Central Bank to bolster the indebted south ahead of future rises all took turns in roiling markets.
Investors are bracing for more bold and, in some cases, tightening moves.
“If a central bank does not move aggressively, yields and risk price in more in the way of rate hikes down the road,” said NatWest Markets’ strategist John Briggs.
“Markets may just be constantly adjusting to an outlook for higher global policy rates … as global central bank policy momentum is all one way.”
Fed funds futures on Friday were pricing in a 44.6 per cent chance that the US rates will reach 3.5 per cent by the end of the year, from the current 1.58 per cent level, according to the CME’s FedWatch. That probability was less than 1 per cent a week ago.
The increasing hawkishness has fueled wild moves in global markets as central banks rush to unwind the monetary support measures that have helped propel asset prices higher for years.
Worries that the Fed’s aggressive rate hike path will push the economy into recession had grown recently, slamming stocks – which entered bear market territory earlier this week when the S&P 500 extended a decline from its record to more than 20 per cent. The index’s 6 per cent decline in its worst weekly drop since March 2020.
Shifting rate expectations have also sparked big swings in bond and currency markets.
Reuters reported that the ICE BofAML MOVE Index, which tracks Treasury volatility, stands at its highest level since March 2020, while the Deutsche Bank Currency Volatility Index measures expectations for gyrations in FX, has also headed higher this year.
Overall, according to BofA Global Research, global central banks have already raised rates 124 times so far this year, compared with 101 increases for all of 2021 and six in 2020.
Tighter monetary policy is coming on the heels of the worst inflation many countries have seen in decades. US consumer prices, for instance, grew at their fastest pace since 1981 May.
Higher rates, soaring 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, equity swings and borrowing costs to compile the most widely used financial conditions indexes.
Tighter financial conditions may translate to businesses and households curtailing spending plans, saving and investing. According to Goldman, a 100-basis-point tightening in conditions cuts growth by one percentage point in the following year.
“The more aggressive line by central banks adds to headwinds for both economic growth and equities,” Mark Haefele, Chief Investment Officer at UBS Global Wealth Management, told Reuters.
“The risks of a recession are rising while achieving a soft landing for the US economy appears rising.