World stock markets are on track for their worst week since the pandemic crash of 2020.
Global shares have slumped this week, falling into a bear market, as investors fear that central banks will derail the economic recovery by tightening monetary policy.
A series of interest rate rises in recent days have heightened concerns that some economies could fall into recession in the coming months.
MSCI’s All-Country World Index of global shares has tumbled by over 5.5% so far this week, with heavy losses across world markets. It is on track for its worst week since March 2020, when the Covid-19 pandemic sent markets slumping.
Global stocks are now more than 20% off their record high, and have hit their lowest level since November 2020, when the first successful Covid-19 vaccine trials triggered a global rally.
This week has seen the biggest increase in US interest rates since 1994, a surprise hike in Switzerland, and the fifth increase in UK interest rates since December, as central bankers stepped up their attempts to cool red-hot inflation despite the risk of recession.
Economists predict that UK interest rates will continue to rise; August could bring the first 50-basis-point rise since 1995, which would take rates from 1.25% to 1.75%.
On Thursday the Bank of England pledged to act ‘forcefully’, if needed, to subdue inflationary pressures. Analysts at BNP Paribas Markets 360 say:
We now expect a more frontloaded path of tightening than we did before and a slightly more restrictive terminal rate. We see 125bp of further tightening this year, including 50bp in August, taking Bank Rate to 2.5% by year-end.
Mark Haefele, chief investment officer at UBS Global Wealth Management, explains that central banks have got tough on inflation this week, increasing the risk of an economic downturn.
The more aggressive line by central banks adds to headwinds for both economic growth and equities. The risks of a recession are rising, while achieving a soft landing for the US economy appears increasingly challenging.”
Investors have become increasingly concerned by the potential for further disruptions of energy supplies from Russia, Haefele adds. Gazprom cut supplies through a critical Baltic Sea pipeline bringing gas to Europe this week.
“The expected fall in inflation has been delayed by the surge in energy and food prices resulting from the war in Ukraine, while disruptions arising from the pandemic are also lingering longer than forecast.”
Heavy losses in many Asia-Pacific markets today, following a rout in Europe and Wall Street yesterday, showed recession fears were rising.
The ongoing coronavirus lockdowns in China are causing further problems for the global economy too, my colleague Martin Farrer writes:
Supply chain snarl-ups in the world’s second largest economy that started during the pandemic are predicted to continue into next year at least thanks to the shutdown of Shanghai and other key regions.
The bigger picture is that China was already facing problems ranging from the decoupling from the west amid geopolitical tensions, a faltering, hugely indebted property market, and the uncertainty caused by president Xi Jinping’s crackdown on large tech companies.
Bond markets have been volatile this week, with the yields (a measure of borrowing costs) on UK, German and Italian government debt hitting eight-year highs, before dropping back today.
US 10-year Treasury bond yields hit their highest since 2011 this week, after the US Federal Reserve hiked interest rate by 75 basis points, in a hawkish attempt to cool prices.
Weak economic data has also worried investors, with the UK economy contracting 0.3% in April, and new housebuilding projects in the US hitting a 13-month low in May.
Recession worries hit commodity prices. Copper, a bellwether of the global economy, has dropped 3% this week to a one-month low.
Bill Blain, market strategist and head of alternative assets at Shard Capital, says central bankers are struggling to get to grips with the inflation shock of the Ukraine War, following the shock of the pandemic.
The UK is now predicting Q3 inflation of 11%. And, raising rates is a massive problem for markets – as the downside volatility has shown this week.
Reading through acres of market research, the credibility of Central Banks is being questioned around the globe. They face a devil or the deep blue sea choice – how to a) preserve jobs and economic stability by avoiding a market crash, or b) slashing inflation? And/or is not an option. It’s a thankless task, made more complex by the consequences of the last 13 years of monetary experimentation.
Cryptocurrencies have crashed this week. Bitcoin has slumped by almost 30% since last Friday to around $20,900 this morning, down from $29,000 a week ago.
The Financial Times reported that the Singapore-based crypto hedge fund Three Arrows Capital – which has $10bn under management – failed to meet demands from its lenders this week amid the slide in crypto values.
A market trends indicator by BofA Securities has fallen to zero for the first time since the pandemic-induced mayhem in financial markets in 2020, Reuters reports.
This signals “extreme bearishness” as investors dumped credit and crypto assets.
A global recession is on the way, warns Robin Brooks, chief economist at the Institute of International Finance.
He points to the slowdown in manufacturing activity in the US:
European stock markets are pushing higher, with the UK’s FTSE 100 now up 56 points (+0.8%) at 7101 points.
But that still leaves the blue-chip indx down almost 3% this week, after heavy losses yesterday.
The pan-European Stoxx 600 has now gained 1%, but also down over 3% since the start of trading on Monday.
Russ Mould, investment director at AJ Bell, says it has been a very chaotic week.
The sun is shining bright, the weekend is here, yet all investors can think about is medicine to calm the motion sickness after one of the most chaotic five days for stocks and shares in a long time.
“Rising inflation, rising interest rates and a rising chance of a recession have all served to turn stomachs in equity-land.
So far this year, the FTSE 100 has lost around 4%, while the US S&P is down 24%, and the Nasdaq has slumped by almost 33%.
This is a shock to the system for many investors who are relatively new to the game and haven’t seen a proper market correction before.
The big travel news of the morning is that Gatwick airport is reducing its summer capacity to ward off potential chaos.
The move follows major disruption over the platinum jubilee and half-term holiday, when dozens of last-minute cancellations wrecked the travel plans of holidaymakers.
London’s second busiest airport will limit the number of daily take-offs and landings to 850 in August – about 50 more than the average in early June, but more than 10% below its pre-pandemic maximum.
The airport is the biggest base for easyJet, which operates more than half of Gatwick slots, and the airline said it would be reviewing the details. It is likely to have to trim its summer schedules after it made hundreds of last-minute cancellations, more than any other UK carrier, in recent weeks due to multiple problems.
Shares in easyJet are up 1.4%, while British Airways owner IAG is 2% higher.
Tesco’s shares have dipped a little in early trading, down 0.2%, after this morning’s trading update.
Tesco’s CEO Ken Murphy says shoppers are buying less and trading down to cheaper products.
On a call with reporters, Murphy explained that customers are seeking out cheaper products in areas where prices have risen significantly, including bread, pasta and baked beans.
People are also making more shopping trips, but buying less each time, as they try to manage their budgets as inflation eats into disposable incomes.
“We are seeing higher frequency shopping trips, so there’s an elevation in the number of shopping trips, we are seeing basket sizes coming down a little bit.”
Here’s Matt Britzman, equity analyst at Hargreaves Lansdown, on Tesco’s trading statement and cost of living warning:
“After a slew of retailers warned on profits it’s encouraging to see Tesco keeping guidance unchanged. That’s not to say they’re immune to the current pressures, back in April we heard consumer spending wasn’t showing signs of weakness yet, but it always felt like it was round the corner.
Those cost pressures are now starting to take their toll and management called out changing behaviours today, that puts more emphasis on grocers offering a strong value proposition which is an area Tesco deliver well on.
Aldi Price Match and Low Everyday Prices are being rolled out further, with distribution up shy of 20% from last year, that’s helping keep prices at a level consumers can stomach and the group’s snapping up market share as a result.”
The UK stock market has opened cautiously as recession fears grip investors.
The FTSE 100 index is up just 8 points at 7053 points, having hit a three-month low last night as markets tumbled.
Oil giants BP (-2.3%) and Shell (-2%) are the top fallers, along with mining companies such as Rio Tinto (-1.3%) and Anglo American (-0.7%), on concerns that slower growth will mean less demand for oil and commodities.
European markets have crept a little higher, with Germany’s DAX and France’s CAC up 0.2% each.
Tesco faces a growing threat from discount retailers Aldi and Lidl, says Freetrade senior analyst Dan Lane, as customers seek out cheaper options.
Lane predicts that inflation-induced belt tightening will lead more households to head to a German discounter, who have already been growing their market shares this year.
Describing a ‘changing customer behaviour’ is as far as Tesco will go today but that almost certainly means shoppers are trading down and tackling the cost of living in the supermarket.
Ken Murphy will hope his cocktail of Aldi Price Match, Low Everyday Prices and Clubcard Prices will keep customers around but it’s the first of that list that’s key now.
Aldi Price Match will become even more important as long as customers are forced into real discount mode. Tesco experimented with its own cheap chain in Jack’s and it just didn’t work, so it’s clear that keeping its ranges wide and its prices low has to be the strategy now.
The cost of living crisis is damaging many people’s physical and mental health, as the prices of necessities continue to soar.
A new poll, for BBC News, also found that households across the UK are reducing the amount of food they are buying, socialising less, turning off lights, travelling less and expecting to work more, as they try to deal with rising prices.
Here are the key points:
- More than half (56%) of UK adults say they reduced the amount of food they’ve bought to save money
- Eight in ten (81%) UK adults report being worried about the cost of living — with adults aged 35-54 most concerned.
- Of UK adults worried about the cost of living, two thirds (66%) say this is having a negative effect on their mental health. Young adults are significantly more likely to say they have experienced negative mental health effects, with five in six (83%) saying this.
- 45% of people report that worrying about the cost of living has had some negative effect on their physical health
- 49% of UK adults expect their personal financial situation to worsen in the next 6 months and 52% expect to work more hours. Approximately two in five UK adults say they expect to be able to save for Christmas in the next six months
- One quarter (24%) of UK adults say the support recently announced by the Government is enough to help people with the rising cost of living.
Tesco’s online sales in the UK have dropped by 14.5% compared with a year ago, today’s trading statement shows.
Sales at large stores are down slightly, while takings at convenience store are up 6.2%, as the relaxing of pandemic restrictions sees more people return to work, and less demand for home deliveries.
Here’s Steve Dresser, CEO of Grocery Insights, with early reaction:
Good morning, and welcome to our rolling coverage of business, the world economy and the financial markets.
Customers are facing “unprecedented increases in the cost of living” as rising prices hammer households.
That’s the verdict from Tesco this morning, the day after the Bank of England warned that inflation will hit 11% this October, in the worst squeeze on households in decades.
Ken Murphy, Tesco’s chief executive, warns that the market environment “remains incredibly challenging”, with signs that customers are changing their shopping behaviour as inflation bites.
The UK’s largest supermarket chain has reported that its underlying UK sales dropped by 1.5% in the three months to 28th May (excluding fuel sales and VAT). That’s compared with a year ago when the pandemic lockdown boosted demand for grocery.
Although difficult to separate from the significant impact of lapping last year’s lockdowns, we are seeing some early indications of changing customer behaviour as a result of the inflationary environment.
Customers are facing unprecedented increases in the cost of living and it is therefore even more important that we work with our supplier partners to mitigate as much inflation as possible.”
Tesco is also sticking to its profit forecasts, and says it has grown market share over the quarter against rivals.
Like-for-like sales fell 2.4% in the Republic of Ireland over the quarter.
As Tesco has over a quarter of Britain’s grocery market, it has a very good view of the state of the economy.
And Murphy’s concerns come just a day after a report warned that food price rises in the UK could hit 15% this summer – the highest level in more than 20 years, with meat, cereals, dairy, fruit and vegetables are likely to be the worst affected.
Anothe survey has found that more Britons are now skipping meals or using a food bank, due to rising inflation.
Also coming up today
Recession fears are gripping markets, after a raft of rate hikes this week from the Federal Reserve – its biggest in 28 years, the Swiss National Bank (unexpectedly), and the Bank of England to get a grip on inflation.
Stocks slumped yesterday, with London’s FTSE 100 racking up its worst fall in three months (down over 3%), as the blue-chip index fell to its lowest since March.
Wall Street was hammered again, wiping another 3.25% off the benchmark S&P 500 index.
Shares in Asia are now sliding today, on worries that these tighter monetary policies from central banks could undercut a global economic recovery. Japan’s Nikkei is down 1.5%, while Australia’s main index has shed almost 2%,
The outlook is worsened by the likelihood of the conflict in Ukraine dragging on and the west’s economic war on Russia leading to even higher energy prices ahead of the northern hemisphere winter.
“The speed and degree of policy tightening may prove too much for economies to handle, particularly given the commodity price shock currently in play,” economists at NAB bank in Australia said in a note on Friday.
“As a result, recession risk for several of the major advanced economies, including the US, is uncomfortably high.”
David Bassanese, chief economist of Betashares in Sydney, went further and predicted a US recession “within the next 12 months” due to persistent inflation and the Fed’s pledge to raise rates until the inflation genie is back in the bottle.
European stocks are expected to open higher today after Thursday’s rout.
- 10am BST: Eurozone inflation rate for May (final estimate)
- 1.45pm BST: Federal Reserve chair Jerome Powell speaks at the Inaugural Conference on the International Roles of the U.S. Dollar
- 2.15pm BST: US industrial production for May