Wall Street losses accelerated as the closing bell of operations approached, with traders struggling to make the final moves ahead of US inflation forecast for Friday morning (US time). The fall of the S&P 500 more than doubled in the last hour of trading.
Weak markets began on the other side of the Atlantic after the European Central Bank said it would raise interest rates next month for the first time in more than a decade. Another rise is expected for September, possibly double the July increase, and the central bank will also stop its bond-buying program next month.
“Even if the market hits bottom in May, we’ll see another sale at some point … and some of us will feel worse than we thought because we thought it was over.”
Nancy Tengler, CEO of Laffer Tengler Investments
All of this marks a “radical shift” in European Central Bank policy, according to Marilyn Watson, head of BlackRock’s fundamental global fixed income strategy.
And it is part of a growing global tide where central banks are eliminating very low interest rates that were meant to increase debt, economic growth and stock prices during the pandemic. Instead, they have focused their attention on raising interest rates and making other moves to curb growth in order to eliminate high inflation.
The risk is that these moves could lead to a recession if they are too aggressive. Even if central banks can perform the delicate balancing act and avoid a recession, higher interest rates put downward pressure on equities and all kinds of investments independently.
The expectation is that the Fed will raise its key interest rate next week by half a percentage point, the second consecutive increase in double the usual amount. Investors expect a third to arrive in July.
Christine Lagarde, President of the ECB. The central bank said it would raise interest rates next month for the first time in more than a decade. Credit: Getty
From where the Fed is going depends on the trajectory of inflation, which is why Wall Street is so valued in the last reading of the US consumer price index. Economists expect inflation to slow slightly to 8.2% in May from 8.3% in the previous month.
Investors have been looking for signs that inflation has already peaked, which would be good for the markets because it could mean a less aggressive Fed. Speculation has been rising and falling that the Fed could pause interest rate hikes at its September meeting, oscillating with every data point on the economy. This, in turn, has made stocks especially prone to large fluctuations.
The S&P 500 lost 97.95 points to close at 4,017.82, while the Dow Jones Industrial Average fell 638.11 to 32,272.79 and the Nasdaq fell 332.05 to 11,754.23.
European stocks plummeted immediately following the European Central Bank’s announcement on interest rates, which came ahead of the opening of US markets. French stocks fell slightly ahead of the announcement, but then the CAC 40 index fell to a loss of 1.4 percent. The German DAX lost 1.7%.
Confinements in major Chinese cities due to COVID-19 have added more pressure to global supply chains, which in turn worsens inflation. But some of the effects could be reduced. China reported its exports up 17 percent year-on-year in May, up from 3.7 percent in April as coronavirus precautions eased in Shanghai and other cities.
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Many investors are preparing for major changes in financial markets to continue due to deep uncertainties about where inflation and Fed policies are heading. Shares have rebounded since bottoming out in the middle of last month, but the S&P 500 continues to fall 15.7% year-over-year so far.
“Even if the market bottomed out in May, we will see another sale at some point,” Nancy Tengler, CEO of Laffer Tengler Investments, wrote in a research note, “and some of us will feel worse than that we thought because we thought it was over. “
with AP
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