Mood soured by fears of higher rates and lower growth
A perfect storm of fears about inflation, the prospect of higher rates and a lockdown in Shanghai are weighing on sentiment. Last week, Federal Reserve chair, Jerome Powell, issued a clear message there will probably be a 50-basis point rate hike next month. Since then, we have witnessed intense selling pressure on stocks. The global economy was already coming off the boil as the post-pandemic boom was running out of steam. In the early months of 2022, the warnings about rising inflation were growing lounder and louder. As a result, the Fed lifted rates by 25 basis points in Mach, and since then, the language from the US central bank has become even more hawkish.
Russia’s invasion of Ukraine has captured the bulk of the headlines in Europe, but all the while, the Beijing authorities are grappling with Covid-19 in Shanghai. The city has re-entered lockdown and there are fears that other pockets of China could suffer a similar fate. The aggressive rise in the cost of living is likely to chip away at demand, so the last thing that consumers needs is a bout of aggressive interest rate hikes. In the past week, the IMF and the World Bank lowered their forecast for global growth, so rate hikes are likely to speed up the cooling of the world economy. Equity markets have recovered a little, and they are now off the sessions lows but keep in mind the FTSE 100 dropped to a one month low earlier.
It has been a tough day for minerals due to the demand fears surrounding China. Industrial metals such as silver, copper and palladium and all nursing heavy losses. It is a similar situation with WTI and Brent crude. China is one of the largest importers of commodities in the world, so concerns about its growth prospects are hanging over the commodities. Gold is in the red on account of the bullish move in the US dollar – it registered a new two-year high.
EUR/USD fell to a two-year low as a mixture of a weaker euro and the firmer dollar dented the currency pair. The greenback is still in its uptrend and considering the chatter about a 0.5% rate hike next month, the positive move is likely to remain. The Swiss franc and the Japanese yen are in high demand because of the overall bearish mood in the markets.