Global stock markets have begun November in a downbeat mood as hopes that central banks might soon start slowing the pace of interest rate rises have been dashed. Both the US Federal Reserve and the Bank of England (BoE) raised rates by 75 basis points this week, which was in line with expectations.
Investors had hoped, however, that policymakers would provide some indication that rates could be close to their peak. Despite the growing likelihood of recession on both sides of the Atlantic, this appears not to be the case. Both Fed chair, Jerome Powell, and BoE governor, Andrew Bailey, repeated the mantra that even as growth starts to slow, bringing inflation under control remains their priority – a view endorsed by European Central Bank president, Christine Lagarde, later on Thursday.
The job of central banks has been made more challenging by strength in the labour market: latest figures show that in both the US and the eurozone unemployment remains low and a lack of vacancies is leading to higher wages, adding to the upward pressure on prices. However, a number of indicators suggest major economies in Europe and North America may be on the verge of a slowdown, if not already in recession.
On Wall Street, the Dow Jones Industrial Average ended trading on Thursday 2.6% down for the week so far, while the S&P 500 lost 4.6% as recent optimism that interest rate rises may soon come to a halt evaporated. Powell made it clear that the Fed will continue tightening monetary policy until it sees clear signs of slowing price rises. As yet, he said, there is little indication the battle against inflation is being won. Energy stocks also lost ground this week on fears the Biden administration could introduce a windfall tax on what it views as excessive profits.
In the UK, the FTSE 100 closed on Thursday 2% up for the week, despite the BoE’s gloomy prognosis. After announcing the steepest interest rate rise in several decades, Bailey warned that Britain was facing a long-lasting – albeit shallow – recession which is unlikely to end until 2024. He added, however, that interest rates in the UK are likely to peak next year at a lower level than the market is currently expecting. Bailey’s comments saw the pound fall to its lowest level versus the US dollar since mid-October, with sterling weakness combining with rising commodities prices to provide a boost to many of the multinational companies that dominate the FTSE 100.
In Frankfurt, the DAX index ended Thursday’s session down 0.9% for the week, while France’s CAC 40 lost 0.5%. On Monday it was reported that eurozone inflation had hit a record high of 10.7% in October, up from 9.9% a month earlier. Russia’s decision to withdraw from a deal to guarantee the safety of grain exports from Ukraine through the Black Sea also led to sharp rises in wheat prices, although the Kremlin appeared to backtrack on its decision later in the week.
In Asia, investors in Hong Kong finally had something to celebrate as the Hang Seng index brought its recent run of losses to an end. It had risen 3.2% by Thursday’s close after it emerged officials were considering reopening travel between Hong Kong and mainland China. However, a new Covid-19 lockdown centred on a Zhengzhou factory which makes electronics for a major US technology firm was the latest example of the economic impact of Beijing’s “zero-Covid” policy. In Japan, the Nikkei 225 index of leading shares closed 2.1% ahead as a number of Tokyo-listed companies reported strong third-quarter earnings.
Hong Kong Hang Seng
Note: all market data contained within the article is sourced from Bloomberg unless stated otherwise, data as at 3 November 2022.