Bear Grip Tightens Global Equities

"For the first time since 2009, the past week marked the third straight quarter of declines owing to which market volatility has returned over in the fortnight, especially following the most recent FOMC meeting."

The global equities fell for a third consecutive week due to market turmoil in the UK and indications that the Federal Reserve still has work to do in containing inflation, while the yield on the standard 10-year US Treasury note temporarily crossed the 4 per cent threshold for the first time since 2008. The S and P 500 index dropped down to levels seen in November 2020 after breaking below mid-June lows. For the first time since 2009, the week marked the third straight quarter of declines. Market volatility has returned over the past few weeks, especially following the most recent FOMC meeting.

Due to its 23 per cent annual decline, the S and P 500 has once again entered a bear market. Financial markets now appear to be generally pricing in a new base case scenario, when there had previously been discussion about whether the economy could emerge from this tightening cycle with a ‘soft landing’. The one bright spot in this situation may be how successfully market participants, including Federal Chairman Jerome Powell, have advertised an impending recession. “The chances of a soft landing are likely to diminish to the extent that the policy needs to be more restrictive, or restrictive for longer,” Powell said in his most recent press conference.

European stock prices dropped as a result of weak earnings’ report and recessionary worries. The STOXX Europe 600 index for all of Europe finished the week 0.65 per cent lower in local currency terms. Germany’s DAX index was down 1.38 per cent, France’s CAC 40 index fell 0.36 per cent and Italy’s FTSE MIB index fell 1.98 per cent. The FTSE 100 index in the UK dropped 1.78 per cent. An official estimate shows that inflation in the euro zone increased to a record 10.1 per cent in September from 9.1 per cent the previous month. The result exceeded the widely expected 9.7 per cent increase and supported market expectations for a significant rate increase in October.

Despite some positive economic indicators, Japan’s equities markets ended the past fortnight exactly where they had begun, and closing at a three-month low. The Nikkei average closed at its lowest level since July 1 after dropping 4.5 per cent to 25,937. The broader TOPIX benchmark also declined, finishing 4.2 per cent below where it started the week. China’s stock markets continued with losses with Shanghai Composite index falling 2.1 per cent and the blue-chip CSI 300 index, which monitors the biggest listed companies in Shanghai and Shenzhen, plunging 1.4 per cent.

Since the consumer price indices in the US have risen to a 40-year high level, inflation has been a cloud over markets. The Fed and other central banks throughout the world have prioritised reducing inflation as soon as possible.