Mixed economic data in the United States provided investors with fresh grounds for pessimism this week, sending global shares lower after a largely positive start to the year.
Markets appear increasingly resigned to a continuation of 2022’s interest rate rises, as well as a slowdown in growth as tighter monetary policy takes its toll. Continued warnings from central bankers that they will have no choice but to raise rates again and again until inflation drops significantly appear to be breaking through.
In the US, Wednesday’s weak retail sales figures initially fuelled speculation that the Federal Reserve may start to slow the pace of rate rises in the near future. But these hopes were dashed 24 hours later by statistics underlining the tightness of the American jobs market – and the potential for rising wages to add to inflationary pressures. Meanwhile, a majority of economists at the World Economic Forum in Davos, Switzerland, forecast a global recession in 2023. Fears of slowing growth continue to weigh on the energy and commodity stocks which performed so strongly in the first half of last year.
On Wall Street, the Dow Jones Industrial Average ended trading on Thursday 3.7% down for the week so far, giving up all its 2023 gains to date, with the S&P 500 losing 2.5%. While mixed economic data has been behind most of this week’s decline, weak quarterly trading reports have also played a part in driving stocks lower. There are signs that bank earnings may not be holding up as well as previously thought, while a number of major technology businesses are planning widespread cost-cutting programmes in response to a deteriorating outlook. With the Fed warning it will carry on tightening monetary policy despite its impact on growth, investors are increasingly concerned that a damaging slowdown is on the horizon.
In the UK, the FTSE 100 closed on Thursday 1.2% down, despite a bright start to the week which saw the index add to recent gains and approach its record high. Earnings reports from London-listed firms have been positive overall so far and markets are hopeful the UK recession may be less severe than has been feared. However, the slump in US stocks and signs of weakening global growth – which saw energy and commodity prices fall later in the week – dragged the FTSE down on Wednesday and Thursday.
In Frankfurt, the DAX index ended Thursday’s session down 1.1% for the week, while France’s CAC 40 lost 1%. European shares endured their worst day of 2023 on Thursday as a result of falls on Wall Street, fears about a worldwide recession and the latest hawkish comments from the European Central Bank. The organisation’s chair, Christine Lagarde, reiterated that interest rates would continue to rise this year, possibly as steeply as in late 2022, while inflation remains ahead of target.
In Asia, the Hang Seng index in Hong Kong dipped 0.4% as latest figures demonstrated the impact of China’s strict Covid-19 policies on the country’s growth last year: the Chinese economy expanded by the smallest amount in nearly 50 years in 2022. Japan’s Nikkei 225 index of leading shares, meanwhile, gained 1.1% thanks to the Bank of Japan’s decision to keep its monetary policy unchanged, despite rising inflation in the country.
Note: all market data contained within the article is sourced from Bloomberg unless stated otherwise, data as at 19 January 2023.
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