TOKYO (AP): Global stocks drifted lower Tuesday in the wake of Wall Street’s tumble into a bear market, as investors anxiously contemplated a new and uncertain world of higher interest rates, international conflict and recession fears.
Shares traded down in Europe, erasing brief gains after the markets opened, while Asian shares fell but later recovered some gains.
The STOXX Europe 600 Index was off 0.5% after opening higher. France’s CAC 40 was off 1.33%, the DAX was down 0.55% and the FTSE fell 0.4%. In Asia, Shanghai advanced, while Hong Kong ended flat and Tokyo declined.
Tuesday’s market action follows downbeat headlines from Monday on Wall Street, where the benchmark S&P 500 lost 3.9%, taking it 21.8% below its peak. That meant a bear market, when an index has fallen 20% or more from a recent high for a sustained period of time.
At the center of the sell-off is the U.S. Federal Reserve’s effort to control inflation by raising interest rates. The Fed is scrambling to get prices under control and its main method is to raise rates, but that is a blunt tool that could slow the economy too much and cause a recession. The war in Ukraine is sending oil and food prices sharply higher, fueling inflation and sapping consumer spending, especially in Europe.
“The old, pre-corona equilibrium, with low inflation, ultraloose monetary policy and low geopolitical risk premiums no longer holds,” said Andreas Koester, head of portfolio management at Union Investment in Frankfurt, Germany.
“Now we are in a transition to a new, post-corona equilibrium, of which only the outlines are visible, such as higher inflation levels or a return to great power competition on the international scene,” Koester added.
Sharp declines, however, can offer risk-hardy investors an opportunity to snap up bargains. U.S. shares appeared headed for a modest rebound when markets open, with the future for the Dow industrials up 0.05%. The future for the S&P 500 was 0.1% higher.
Some economists are speculating that the Fed may raise its key rate by three-quarters of a percentage point when it meets on Wednesday. That’s triple the usual amount and something the Fed hasn’t done since 1994.
“Global markets … have been demonstrating that they don’t like where the global economy sits right now,” Robert Carnell, regional head of research Asia-Pacific at ING, said in a report.
Other central banks worldwide, including the Bank of England, have been raising rates as well, while the European Central Bank said it will do so next month and in September.
Apart from jitters over inflation and what central banks are doing to temper surging prices, restrictions to curb the spread of COVID-19 in China also have been weighing on market sentiment in Asia.
The shift by central banks, especially the Fed, toward higher interest rates has reversed the spectacular rise in share prices spurred by massive support for markets after the pandemic hit in early 2020. Markets are bracing for more bigger-than-usual hikes, on top of some discouraging signals about the economy and corporate profits, including a record-low preliminary reading on consumer sentiment soured by high gasoline prices.
Higher interest rate benchmarks raise returns on less speculative investments such as bonds, increasing their attractiveness relative to stocks. And the moves by design will slow the economy by making it more expensive to borrow.
The risk is central banks could cause a recession if they raise rates too high or too quickly. Last month, the Fed signaled additional rate increases of double the usual amount are likely in coming months. Consumer prices in the U.S. are at the highest level in four decades, and rose 8.6% in May compared with a year ago.
One of the more reliable warning signals for an economic recession has been sounding as short-term U.S. Treasurys briefly yielded higher than longer-term ones. That can be a sign of pessimism about long-term prospects and signal a recession might be on the way.
Another factor influencing inflation and investor sentiment is the price of oil. It remained near $120 a barrel Tuesday, about 60% up so far this year.
Benchmark U.S. crude bounced back from losses earlier Tuesday, gaining 54 cents to $121.47 a barrel in electronic trading on the New York Mercantile Exchange. It gained 26 cents to $120.93 on Monday.
Brent crude, the international standard, gained 62 cents to $122.89 a barrel.
In currency trading, the dollar slipped to 134.29 Japanese yen, down from 134.46 yen late Monday. The euro cost $1.0446, up from $1.0409.