Stock markets drop on inflation and slowdown fears

Global equities and shorter-dated US Treasuries dropped on Monday as investors dialled up their predictions of an economic downturn, sustained high inflation and central banks raising interest rates.

Europe’s Stoxx 600 share index opened 1.3 per cent lower, putting it on track for its fifth straight session of falls. The regional share gauge has lost more than 7 per cent so far this quarter.

Futures trading implied the US S&P 500 index would lose 1.9 per cent in early New York dealings. The blue-chip stock barometer also fell 2.9 per cent on Friday to close out Wall Street’s worst week since January.

A broad FTSE index of Asian shares outside Japan fell 2.6 per cent and the Nikkei 225 in Tokyo lost 3 per cent.

At its monetary policy meeting this week, the US Federal Reserve is expected to confirm its willingness to rapidly raise interest rates to curb inflation that hit an unexpectedly high annual rate of 8.6 per cent in May.

“Inflation data strengthens the case for an aggressive front-loading of hikes with room for another shift towards more aggressive tightening,” Credit Suisse strategists said in a research note.

The yield on the two-year Treasury note, which reflects interest rate expectations, rose by 0.13 percentage points to 3.17 per cent as the price of the debt instrument fell. Money markets are now tipping the Fed to increase its main funds rate to 3.4 per cent by December, from a rate of between 0.75 per cent and 1 per cent currently.

In Europe, the yield on Italy’s two-year bond rose 0.13 percentage points to 1.77 per cent while its 10-year yield rose 0.06 percentage points.

Inflation has surged worldwide after oil prices rose in response to western powers placing sanctions on top crude producer Russia for its invasion of Ukraine. The war has also pushed up global food prices, while Covid-19 lockdowns in China have put further pressure on global supply chains already disrupted by the pandemic.

On Monday, Beijing reported a “ferocious” new outbreak in its populous Chaoyang district, quashing market optimism that the world’s second-largest economy could soon fully reopen. Brent crude oil, which remains more than 50 per cent ahead of its price at the start of the year, fell 1.6 per cent on Monday morning to just under $120 a barrel.

Economists also see the Bank of England raising its main borrowing rate by 0.25 percentage points on Thursday, albeit with an increasing chance of a 0.5 percentage point rise — escalating fears of stagflation, driven by a cost of living crisis combined with higher debt costs.

The US is now likely to tip into recession next year, according to 70 per cent of leading economists surveyed by the Financial Times and the Initiative on Global Markets at the University of Chicago’s Booth School of Business.

The dollar index, which measures the US currency against six others, rose 0.4 per cent as traders herded out of risky assets. Sterling fell 0.4 per cent to just over $1.22, pushed down by the dollar’s strength as well as concerns for the UK economic outlook.

The yen touched a 24-year low of ¥135.19 per dollar, ahead of a monetary policy meeting by the Bank of Japan on Thursday and Friday, where it might continue defying the global trend towards higher interest rates in a bid to support economic growth.