Major stocks across the Atlantic closed in the red on fears of action by central banks as high inflation in Europe and the US points to further tightening of monetary policy, with further increases in the main interest rate – possibly recession cannot be avoided.
The Dow Jones Industrial Average closed down 2.79% at the start of the week at 30,516.74.
The Standard & Poor’s 500 slipped 3.88% to 3749.63 points, entering a “bear market” (when an asset falls 20% from its last high). The S&P 500 is down more than 20% from its all-time high in January.
For its part, the Nasdaq Composite Technology Index fell 4.68% to 10,809.23.
Investors remain cautious amid renewed worries about inflation, the continued rise of which could lead to further tightening of monetary policy.
Last Thursday, the European Central Bank decided to leave key interest rates unchanged, however, confirming the possibility of an increase in July and September.
After the ECB became the latest central bank to announce restrictive policies to fight inflation, caution has doubled when it comes to investing in risky assets like stocks.
This week it will be the Fed’s turn to announce its monetary policy decision, but rates are already starting to climb for a surprise 75 basis point hike.
Until a few days ago, everyone was expecting the Fed to raise the federal funds rate by 50 basis points at the June meeting and another 50 basis points at the July meeting. But traders are already anticipating a 75 basis point Fed rate hike.
Let’s see why. After starting the rate hike cycle in March with a 25 basis point hike, the US Federal Reserve raised its key rate by 50 basis points at its meeting on May 3 and 4, and the minutes of that meeting released meanwhile were in line with what Fed Chairman Jerome Powell had already said: Fed meetings in June and July discussed another 50 basis point hike.
Powell said at the time that he was not considering a 75 basis point increase. But since then, the scenario has deteriorated further: inflation in the US it hit 8.6% in May, a new 40-year high, higher than analysts’ forecast of 8.3%.
Given this, traders are already pointing to the possibility that the Fed will raise key interest rates by 75 basis points at its July meeting. Barclays, by the way, foresees such a possibility at a meeting next week.
Thus, Barclays is the first major Wall Street institution to predict an increase of this amount instead of the 50 basis points that has been so much talked about. “We believe the US central bank now has good reason to raise rates more aggressively than expected at its June meeting,” bank economists said in a research note quoted by Bloomberg.
Reliable U.S. labor market data — hirings up 390,000 in May from an estimate of 318,000 — released on June 3 also pave the way for aggressive price containment measures by the Federal Reserve, even as the labor market appear to remain strong enough for the Fed to do so.
JPMorgan Chase CEO Jamie Dimon recently warned that restrictive central bank policies threaten to plunge the US economy into recession. Citi Chief Executive Jane Frazier also said she believes the US will be fighting to avoid a recession, and other observers and economists are saying the same. Nouriel Roubini, for example, already he warned don’t count on a soft landing.
Today it is Morgan Stanley CEO James Gorman’s turn to do the same, saying he sees a 50 percent risk of a US recession.
These fears haunted most markets in today’s session. As on Friday, the markets were in full swing. Interest on debt in the Eurozone and the United States soared, stock markets sank, the value of the cryptocurrency market fell below a trillion dollars (Bitcoin fell to an 18-month low), gold and oil also lost ground. Who won is the safe haven dollar.