Global stocks tumble on recession, central bank rate hike worries

U.S. and European stocks fell on Monday as the outlook for major global economies darkened, with tech stocks hit hard by fears the Federal Reserve might take a hawkish tone at a central bank summit this week.

Wall Street’s tech-focused Nasdaq Composite gauge fell more than 2% as streaming company Netflix fell more than 6%.

Amazon, Tesla and semiconductor giant Nvidia also lost around 3% as concerns mounted over rising interest rates eroding the value of future cash flow and earnings.

“The Nasdaq is the epicenter of interest rate uncertainty in the equity markets,” said Julian Howard, chief investment officer at GAM. “[The Fed] talks about warmongering, which makes the market quite nervous. The work is not done [on inflation].”

Wall Street’s broad S&P 500 index was down 1.7% by mid-morning in New York after a four-week winning streak on Friday.

Market swings in the United States over the past few weeks have been propelled by hedge funds closing down bearish bets and traders warned on Monday that the recent expiry of a large block of options on Friday could amplify volatility in the day. to come, as it did at the beginning of the week.

In currencies, the euro fell 0.7% against the dollar to $0.996, slipping below $1 after hitting parity with the greenback in July for the first time in two decades. Concerns over possible cuts in Russian energy supplies sent European gas and electricity prices soaring on Monday morning, adding to fears that the continent could slide into recession.

The regional Stoxx Europe 600 gauge lost 1.1%, with Germany’s Dax falling 2.5%.

Growing sentiment of economic gloom precedes the annual Fed rally in Jackson Hole, Wyoming, which the central bank often uses to make big policy announcements. Fed Chief Jay Powell is expected to signal that the central bank will continue to aggressively raise interest rates as it battles high inflation.

“I wouldn’t bet on Powell giving a strong signal to Jackson Hole that he’s ready to change direction on inflation,” said Joost van Leenders, senior investment strategist at Van Lanschot Kempen. “[He will] justify why they are raising rates so quickly and why they have to.

Andrew Hollenhorst, an economist at Citigroup, echoed that sentiment, saying, “We continue to expect a relatively hawkish speech from President Powell in Jackson Hole on Friday.”

He noted that US Treasury yields and the dollar have both risen recently, as investors expect more powerful policy tightening from the Fed, even after the US inflation rate fell slightly in July compared to June.

The policy-sensitive two-year Treasury yield traded at 3.3% on Monday, down from around 2.5% at the end of May and less than 1% at the end of last year. Meanwhile, the dollar gained 0.5% on Monday and climbed 2.4% this month against a basket of half a dozen major currencies, closing in on a two-decade high hit in July.

Global developed market stocks had rebounded strongly in July after a historic first-half rout and were still up for August as of Friday’s close. However, many investors have questioned the sustainability of the recent rally given the strong economic headwinds that are expected for the rest of this year and into 2023.

“I’m not buying into this relief rally. I think we expect more downside for risky markets for the rest of the year,” said Jamie Niven, senior fund manager at Candriam.

Elsewhere, mainland Chinese stocks rebounded on Monday after the People’s Bank of China cut its mortgage rate for the second time this year, in a bid to prop up its indebted real estate sector. The CSI 300 gauge of stocks listed in Shanghai and Shenzhen closed up 0.7%.

Additional reporting by Eric Platt in New York

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