Equities, oil prices slide on recession fears

Stock markets mostly slid and oil prices slumped Tuesday as investors grow increasingly fearful that more big interest rate hikes will tip economies into deep recessions.

The mood darkened also on the worsening Ukraine war, weaker demand expectations in China, and the IMF trimmed its growth forecast for next year.

With the focus on inflation, analysts said US consumer price index data released later this week will be crucial to the direction of risk assets.

Another big reading could spark a fresh equity selloff and a surge in the dollar.

“There is growing pessimism in the markets now and with some big data points to come from the US this week, not to mention the start of earnings season,” noted Craig Erlam, analyst at OANDA trading group.

“Investors should probably brace for more volatility.”

Traders had hoped that bumper rate increases by the US Federal Reserve this year would begin to drag on the economy and slow runaway prices, allowing policymakers to reduce the pace of monetary tightening.

But a forecast-beating US jobs report on Friday highlighted the tough work the country’s central bank has slowing inflation from four-decade highs, and many observers warn recession is virtually inevitable.

– ‘Real danger’ –

World Bank chief David Malpass said Monday there was a “real danger” of a global contraction next year, adding that the surge in the dollar was weakening the developing nations’ currencies and pushing their debt to “burdensome” levels.

However, in its latest forecasts released on Tuesday, the IMF trimmed its 2023 global growth forecast to 2.7 percent. It left its world growth forecast for this year unchanged at 3.2 percent.

But the IMF’s economic counsellor Pierre-Olivier Gourinchas also warned that more than a third of the global economy is headed for contraction this year or next, and the three biggest economies — the United States, European Union and China — will continue to stall.

“The worst is yet to come and, for many people 2023 will feel like a recession,” said Gourinchas.

– Dollar dips –

Chip manufacturers globally took a pounding from new US export controls aimed at restricting China’s ability to buy and make high-end chips with military applications.

Taipei led the losses in Asia — diving more than four percent — as chip giant TSMC plunged 8.3 percent, while a hefty selloff in Samsung Electronics dragged Seoul down 1.6 percent. Tokyo was also sharply lower owing to a hit to tech firms.

All three markets had been closed Monday and were reacting to Friday’s US announcement for the first time.

Europe’s main equity markets closed lower, but Wall Street pushed into positive territory in late morning trading.

On currency markets, the dollar dipped after recent strong gains as the United States heads the monetary tightening drive.

The pound rose, but nevertheless remained under pressure despite the Bank of England unveiling further measures to calm markets rocked by the government’s fiscal plans, saying it would increase purchases of government bonds.

“Investors fear that the UK government is borrowing too much and that it won’t be able to balance its books,” said City Index and FOREX.com analyst Fawad Razaqzada.

Oil prices fell, with concerns about Chinese demand front and centre.

“Covid cases are picking up in the country, and the Chinese Communist Party’s newspaper, the People’s Daily, ran a commentary saying the Covid Zero policy is ‘sustainable’, indicating that the country is likely to keep following it if not double down,” said Stephen Innes at SPI Asset Management.

– Key figures around 1530 GMT –

New York – Dow: UP 0.5 percent at 29,358.39 points

EURO STOXX 50: DOWN 0.5 percent at 3,340.35

London – FTSE 100: DOWN 1.1 percent at 6,885.23 (close)

Frankfurt – DAX: DOWN 0.4 percent at 12,220.25 (close)

Paris – CAC 40: DOWN 0.1 percent at 5,833.20 (close)

Tokyo – Nikkei 225: DOWN 2.6 percent at 26,401.25 (close)

Hong Kong – Hang Seng Index: DOWN 2.2 percent at 16,832.36 (close)

Shanghai – Composite: UP 0.2 percent at 2,979.79 (close)

Euro/dollar: UP at $0.9719 from $0.9708 on Monday

Pound/dollar: UP at $1.1108 from $1.1059

Euro/pound: DOWN at 87.51 pence from 87.76 pence

Dollar/yen: DOWN at 145.70 yen from 145.72 yen

West Texas Intermediate: DOWN 2.2 percent at $89.15 per barrel

Brent North Sea crude: DOWN 2.2 percent at $94.10 per barrel

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