Wall St. poised for modest rebound amid economic pressures

Wall Street stocks began trading with a modest gain on Tuesday, a day after a wave of selling pushed the S&P 500 into a bear market, leaving the index more than 20% below its recent peak.

The index rose 0.3% in early trading, even as European markets reversed their own gains and sank deeper into the red. Markets in the Asia-Pacific region had recovered from the worst of their declines on Tuesday, but still ended lower.

Yields on government bonds – a measure of borrowing costs – have retreated slightly from their highs after hitting a high on Monday.

Yet global markets are on shaky ground as multi-decade highs in inflation, supply chain shortages and geopolitical tensions weigh on growth prospects around the world.

In the United States, inflation is accelerating to its fastest pace since 1981, amplifying concerns about the direction of the economy as soaring prices squeeze household budgets and corporate profits. Data on Friday showed the annual inflation rate jumped to 8.6% in May, defying economists’ expectations that it had remained flat.

As gas, food, rents and other expenses rise sharply, the Federal Reserve, at its Wednesday meeting, is expected to discuss the biggest interest rate hike since 1994. It will announce its latest policy decision on Wednesday, and many investors are betting that rates will rise by three-quarters of a percent.

The turmoil of recent days is a reaction to Friday’s inflation data, said Hugh Gimber, strategist at JPMorgan Asset Management in London. Prior to that, “the narrative was that inflation had peaked, it was coming down, and as a result the pressure was going to ease on the Fed,” he said.

“It was completely reversed,” he added. “It was a really lousy inflation report and it put the Fed under real pressure” to demonstrate how serious it is to bring down inflation.

Gimber said he also expects the Fed to hike rates by 0.75 percentage points on Wednesday. The “message from policymakers will be that nothing is ruled out until we see signs that the trajectory of inflation is improving,” he said.

For the Fed, this is a delicate balancing act. If the central bank takes too aggressive steps to contain inflation, it could dampen the US economy and trigger a recession.

These concerns have led to the massive sell-off in markets in the United States this year. On Monday, the S&P 500, the benchmark stock index, lost 3.9%, wiping out $1.28 trillion in market value. Since hitting a record high in January, the S&P 500 has fallen 22%, marking the seventh bear market in 50 years.

Equity market weakness continued across the Asia-Pacific region on Tuesday, although some markets pared losses at the close. Japan’s Nikkei index fell 1.3%, while in Australia, the key stock index fell about 3.5%, the biggest single-day drop in two years.

Stock indices across Europe opened higher but then crashed. The Stoxx Europe 600 fell 0.6%, after climbing as high as 1%, extending its losses for a sixth straight day.

On Tuesday, government bond yields retreated from their recent highs. The yield on 10-year US Treasuries fell to 3.30%. The day before, as stocks plunged, the yield jumped to 3.36%, the highest since 2011.

At the same time, cryptocurrencies continued to decline amid a series of stock market crashes. On Monday, Celsius Network, an experimental cryptocurrency bank, froze withdrawals, sending depositors into a panic. Bitcoin has fallen to its lowest since 2020. In the early morning hours in New York, it has fallen 7% in the past 24 hours, according to CoinMarketCap.

Investors have tried to make sense of what is happening in the global economy.

The World Bank issued a dire warning last week, saying recession will be hard to avoid for many countries. On Monday, ratings firm Fitch lowered its 2022 forecast for global gross domestic product, or GDP, to 2.9% from an estimate of 3.5% in March. These are just the latest in a series of global economic downgrades as Russia’s protracted war in Ukraine strains global supply chains, disrupts trade and drives up the prices of oil, wheat, metals and other essential commodities.

As inflation soars, central banks around the world, from Australia to Canada, have moved to raise rates. On Thursday, the Bank of England is expected to raise its key rate for a fifth consecutive meeting. Last week, the European Central Bank announced that it would raise rates next month for the first time in more than a decade.

On Tuesday, a German measure of investor confidence rose slightly but still remained deep in negative territory as economic growth faces a considerable number of risks.

“Judging by the collapse of markets this week, however, as investors face the risk of shock and admiration from the Fed, and a series of eurozone rate hikes,” the rise in investor confidence is unlikely to “sustain,” Claus Vistesen, an economist at Pantheon Macroeconomics, wrote in a note.

With the global economic outlook weakening, traders are wondering how far central banks can go to raise rates to rein in inflation without adding to strains on businesses and households.

“It’s really hard for central banks to recognize that growth and inflation are in opposition until inflation has peaked,” Gimber said. Later in the year, central banks may adopt a softer tone, but in the meantime, “with inflation heading in the wrong direction, they need to focus on sending the signal that they are doing whatever is right.” in their power to deal with it,” he said. said.

In its forecast, Fitch raised concerns about “tight” monetary policy and inflation, noting that supply disruptions due to the war between Russia and Ukraine are “impacting faster than expected. on European inflation”.

China also complicates the picture. As the Chinese government stubbornly pursues a zero Covid strategy, the resulting lockdowns and restrictions have stunted China’s growth and added to global supply chain woes. Chinese officials are increasingly concerned about the state of the economy, raising doubts that the country will meet its growth targets.

Fitch also cut growth projections for China as it did not expect the economy to rebound quickly given the government’s commitment to zero-Covid policy.

By cardgo

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