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Stock markets dropped further Friday on prospects of more aggressive rises in interest rates to fight inflation, renewing concerns over the global economy entering recession next year. online news
After a healthy rally in recent weeks fuelled by signs that price rises were slowing, the US Federal Reserve, European Central Bank and Bank of England this week crushed any Christmas spirit by hiking borrowing costs again by sizeable amounts and warning of more pain.
While inflation in most countries has started coming down — helped by a drop in energy costs — it remains at multi-decade highs.
Observers have warned that economies could be heading for a period of stagflation where prices keep rising but growth stalls.
“In a nutshell, it is all about fears over a sharper economic slowdown in 2023 than previously expected,” noted Fawad Razaqzada, market analyst at City Index trading group.
“While macro data have been weak of late, there was still hope that the downturn might be short-lived and that a recession might be avoided in some regions altogether, amid signs of inflation peaking in some regions like the US.”
The latest rate hikes came as data showed US and UK retail sales dropping in November as consumers — key drivers of growth — feel the pinch from high prices and rate hikes.
Recession on horizon
Eurozone and London shares all closed firmly in the red.
Wall Street stocks meanwhile extended losses too, dropping more than one percent by mid-session.
OANDA analyst Craig Erlam said the prospect of a “Santa rally” was fading.
“Going into December, there was growing optimism that policymakers could be a source of optimism going into the new year but instead, they’ve taken on the role of grinch, bringing a swift end to the celebrations,” he added.
Earlier, Asia had also seen losses, with Tokyo closing down 1.9 percent.
On the upside, Hong Kong rose on progress in talks over allowing US officials to audit Chinese firms listed in New York, easing concerns about a possible delisting of some big names such as Alibaba and Tencent.
The news provided a little more help to Hong Kong traders, whose sentiment has been lifted also by China’s shift away from the economically damaging zero-Covid policy as well as moves to open the city further to overseas visitors.
And a report in Hong Kong’s South China Morning Post said the border with mainland China would be fully reopened next month, providing another much-needed boost to the beleaguered economy.
However, the mood was soured a little by a US decision to put 36 Chinese companies including top producers of advanced computer chips on a trade blacklist, severely restricting their access to any US technology.
Key figures around 1645 GMT
London – FTSE 100: DOWN 1.3 percent at 7,332.12 points (closing)
Frankfurt – DAX: DOWN 0.7 percent at 13,893.07 (closing)
Paris – CAC 40: DOWN 1.1 percent at 6,452.63 (closing)
EURO STOXX 50: DOWN 0.8 percent at 3,804.02
New York – Dow: DOWN 1.2 percent at 32,800.82
Tokyo – Nikkei 225: DOWN 1.9 percent at 27,527.12 (close)
Hong Kong – Hang Seng Index: UP 0.4 percent at 19,450.67 (close)
Shanghai – Composite: FLAT at 3,167.86 (close)
West Texas Intermediate: DOWN 2.6 percent at $74.13 per barrel
Brent North Sea crude: DOWN 2.9 percent at $78.84 per barrel
Euro/dollar: DOWN at $1.0605 from $1.0627 on Thursday
Pound/dollar: DOWN at $1.2163 from $1.2175
Euro/pound: DOWN at 87.18 pence from 87.26 pence
Dollar/yen: DOWN at 136.60 yen from 137.80 yen
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economy online news
Notes from APS Radio News
From the early part of March 2020 to April 15, 2022, the US Federal Reserve had been increasing its holdings by nearly $5 trillion dollars.
It did this each month of that period by buying billions of dollars of corporation and government bonds, in effect, infusing massive amounts of money into the economy.
And, as the FRED graph shows, it did so at rapid rate or at a high rate of velocity.
Economists say that when massive amoutns of fiat money are infused into the economy at high rates of velocity, the likelihood of noticeably higher rates of inflation is made greater.
A number of other central banks followed a similar policy.
For example, between late February 2020, even days before the media started fixating on the virus thingy, and March of this year, the European Central Bank embarked on its own version of monetary expansion.
During that period, the ECB increased its holdings by over 5 trillion euros.
The Bank of Japan also increased its holdings.
Between February of 2020 and earlier this year, it had increased its holding by a few hundred trillion Yen.
For a number of years, including the Bank of Japan, major central banks have kept their interest rates low.
For its part, the Bank of Japan kept its interest rates at negative rates, meaning that depositors had to pay banks to hold their money.
During and before the pandemic, major corporations had increased the number of mergers and acquisitions, as those entities were able to make their purchases using inexpensive money and higher stock valuations.
The other part of the equation was that of supply.
As a result of lockdowns, many small and medium-sized businesses were closed.
Shipping ports had lost workers, and truck drivers going to those ports had to wait in long lines, as a result.
In effect, well before Russia’s invasion of Ukraine, shortages of various goods and services developed.
The invasion and sanctions imposed have aggravated shortages of commodities like petroleum and grain.
And there have been instances of price gouging.