Global stock markets clawed back some of their recent losses this week, on hopes that central banks may not need to raise rates as quickly as previously feared. Investors around the world seized on the latest signs of economic weakness as an indication that the pace of monetary policy tightening may have to be slowed in order to avoid a damaging, long-lasting downturn.
Yields on United States government bonds fell back early in the week, reflecting traders’ view that the Federal Reserve now has to balance support for a faltering economy with its efforts to bring inflation under control. New data showing a deceleration of growth across US factories and a slump in new job openings suggest that higher interest rates may already be proving effective in dampening demand. However, voting officials at the Fed keep re-enforcing their hawkish message and ruling out any reduction in the pace of hikes or potential 2023 cuts, stressing that controlling inflation is their number one priority.
There are, however, other headwinds for share prices: OPEC’s decision on Wednesday to make sharp cuts in oil production levels to help to drive crude prices higher is likely to add to inflationary pressures around the world in the weeks ahead. President Biden, however, countered with plans to release additional oil from American reserves next month.
After a calamitous September, the final quarter of 2022 began brightly on Wall Street. The Dow Jones Industrial Average ended trading on Thursday 4.2% up for the week so far, while the S&P 500 gained 4.4%. Both indexes, however, remain well off the levels reached in August and it is possible that an element of bargain-hunting helped sustain the rises earlier this week.
In the UK, the FTSE 100 closed on Thursday 1.5% up for the week, with shares in London lagging their peers in Europe and the US. In part this has been due to a slight rise in the value of sterling against the dollar, as the pound recovers from the slump that followed chancellor Kwasi Kwarteng’s mini-budget last month. But investors in the UK are concerned about another ratings-agency downgrade on sovereign debt, as well as a potential crisis in the mortgage market. Rates on two-year fixed-rate loans have risen from little over 2% at the end of 2021 to more than 6% this week, compounding the pressures on household budgets.
In Frankfurt, the DAX index ended Thursday’s session up 2.9% for the week, while France’s CAC 40 gained 3%. Manufacturing performance across the eurozone continues to disappoint, but there are signs that inflation across the region may be close to its peak.
In Asia, the Hang Seng index in Hong Kong rose 4.6%, bringing its recent slump to a halt. Gains were largely attributable to strength in western markets, with mainland Chinese stock exchanges closed for the Golden Week holiday. Japan’s Nikkei 225 index of leading shares leapt 5.3% following gains in the US. Tokyo-listed energy companies benefited from news of OPEC’s production cut, but latest figures showed inflation in Japan had risen at the fastest rate in eight years.
Hong Kong Hang Seng
Note: all market data contained within the article is sourced from Bloomberg unless stated otherwise, data as at 6 October 2022.