After a positive start to the month, global stock markets lost ground this week on fears that rising oil prices could increase inflationary pressures and lead to further hikes in interest rates
Reports that Russia and Saudi Arabia have agreed to extend the limits imposed earlier this year on crude oil production have driven prices higher, while the prospect of industrial action involving workers at liquid petroleum gas (LPG) producers in Australia has raised fears of spikes in energy costs, particularly in Europe. Latest data also suggests higher interest rates are at last starting to dampen economic activity.
On Wall Street, the Dow Jones Industrial Average ended trading on Thursday 1% down for the week so far, with the S&P 500 shedding 1.4%. While investors on the whole expect the Federal Reserve to leave interest rates unchanged this month, increasing oil prices and data showing strength in the services sector could put pressure on the Fed to tighten further. However, a sharp drop in factory orders last month is the latest sign that rising borrowing costs are impacting manufacturing companies in the US. Technology stocks endured an especially tough week: aside from the prospect of more rate rises, the Chinese government’s decision to ban its employees from using a major US electronics manufacturer’s devices raised fears of further state intervention in trade between the world’s two largest economies.
In the UK, the FTSE 100 closed on Thursday 0.3% down for the week so far with losses limited by gains among the country’s major energy companies following the rise in oil prices. There was also positive news from Bank of England governor Andrew Bailey who told MPs that interest rates in the UK were close to their peak. Indeed, it appears increasingly difficult for the Bank to justify further rate hikes given the parlous state of the UK economy. Recent data showed that private sector activity declined in August for the first time since January, while house prices fell last month at the steepest rate since 2009 during the global financial crisis. In addition, industry bodies said Britain was on the brink of recession and predicted a spike in insolvencies in 2024.
In Frankfurt, the DAX index ended Thursday’s session down 0.8% for the week, while France’s CAC 40 lost 1.4%. Investors in Europe faced a slew of negative economic data, starting with a drop in investor confidence and a decline in German export volumes at the beginning of the week. This news was followed by reports indicating that eurozone private sector output for August had shrunk at its fastest rate in three years, with particular weakness in the construction sector. A warning from the OECD that the European Central Bank may need to raise interest rates further to bring inflation under control did little to improve sentiment.
In Asia, the Hang Seng index in Hong Kong dipped 1.2%, despite a strong start to the week. Shares in China rose on Monday on signs that stimulus measures introduced by the Beijing government were starting to take effect, while Chinese manufacturing data for August showed a significant improvement. However, the fall in exports announced on Thursday saw doubts about the strength of China’s economic recovery return. Japan’s Nikkei 225 index of leading shares, meanwhile, advanced 0.9% and is now more than 20% higher than at this point in 2022. This week’s gains were driven to a large extent by reports of rises in corporate profits among some of Japan’s biggest firms.
Hong Kong Hang Seng
Note: all market data contained within the article is sourced from Bloomberg unless stated otherwise, data as at 7 September 2023.