Global shares endure worst week since March on interest rate worries

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Global stocks had their biggest weekly drop since March, as investors grappled with the prospect of a buoyant US economy keeping interest rates higher for longer and soft data and developments in China that continued to stir concerns about its post-pandemic recovery.

Wall Street’s benchmark S&P 500 oscillated between positive and negative territory on Friday, finishing fractionally lower at the close and falling 2.1 per cent for the week. The tech-focused Nasdaq Composite fell 0.2 per cent and dropped 2.6 per cent over the past five sessions.

Equities have stumbled this week as robust US economic data stamped out hopes that the Federal Reserve — which took interest rates to a 22-year high last month — would start cutting rates soon. Traders on Friday expected the Fed to lower the federal funds rate in May.

The FTSE All-World index notched a weekly decline of 2.6 per cent — its worst performance since the US banking crisis in March sent global equities into a tailspin.

The decline has in part been led by the so-called Magnificent Seven US megacap tech stocks — Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla. The group have lost more than $900bn in value over three consecutive weeks of falls for their worst run of combined market capitalisation decline this year.

The equity sell-off reverberated in government debt markets earlier in the week. Yields on the benchmark 10-year US Treasury moved close to their highest levels since 2007 on Thursday before slipping 0.06 percentage points to 4.25 per cent on Friday. Bond yields rise as prices fall.

The US labour department on Thursday reported that the number of people applying for unemployment benefits declined in the week ending August 12, a sign that the economy remains resilient in the face of higher borrowing costs. Retail sales figures from earlier in the week also increased more than forecast in July.

“Basically, the market has downsized the extent of future cuts as the economy is just not lying down,” said Padhraic Garvey, regional head of Americas research at ING.

Economists will congregate next week in Jackson Hole, Wyoming, for the well-known annual economic symposium for central bankers, which is hosted by the Kansas City branch of the Fed. Investors will be paying attention to Jay Powell, Fed chair, who will share his perspective on the US economy.

In Europe, the region-wide Stoxx 600 fell 0.6 per cent, marking a weekly decline of almost 2 per cent and its worst monthly performance since September. France’s Cac 40 slipped 0.4 per cent and Germany’s Dax was down 0.7 per cent.

Yields on 10-year UK gilts fell 0.07 percentage points to 4.67 per cent on Friday. Yields on the 10-year German Bund — Europe’s regional benchmark — declined by 0.09 percentage points to 2.62 per cent.

Traders’ nerves were stretched further by the continuing flow of weak economic data releases from China, which solidified concerns that the world’s second-largest economy could take a while to rebound fully from three years of severe Covid-19 restrictions.

China’s CSI 300 stock index fell 1.2 per cent and Hong Kong’s Hang Seng shed 2.1 per cent. Japan’s Topix fell 0.7 per cent and South Korea’s Kospi slid 0.6 per cent. 

China’s securities regulator on Friday announced a package of market-friendly reforms to try to “boost capital market investor confidence”, flagging a potential extension of trading hours for the country’s stock and bond markets, as well as lower transaction fees for brokers.

The renminbi strengthened slightly to trade at Rmb7.2812 against the dollar but remained near its weakest level since November after the People’s Bank of China stepped up its defence of the currency.

The central bank set the daily midpoint — around which the currency is allowed to trade 2 per cent in either direction — at Rmb7.2006 to the dollar, well above market expectations.