Global equities slip as recession fears rise

Global equities started the second half of the year on a subdued note as investors struggled to see the end of inflation and interest rate pressures that pushed Wall Street to its worst first-half drop since 1970.

The FTSE All World index of developed and emerging market shares fell 0.3 per cent on Friday afternoon in London, bringing its losses this year to just over 20 per cent.

Europe’s regional Stoxx 600 slipped 0.5 per cent after higher-than-expected eurozone consumer prices data firmed expectations that the European Central Bank would raise interest rates, boosting banking stocks. The regional share gauge has lost about 16 per cent since the end of 2021.

Futures trading also implied Wall Street’s S&P 500, which fell by a fifth in the first six months of this year, would notch another 0.2 per cent decline on Friday. US equities, which set the tone for trading worldwide, have not endured such a punishing first six months of a year since 1970.

Investors have stampeded out of risky assets in recent months after a surge in global inflation driven by delay to supply chains during the coronavirus pandemic. That has been exacerbated by Russia’s invasion of Ukraine and pushed global central banks to rapidly end monetary policies that had encouraged economic growth and borrowing.

“We expect this volatility to extend itself into the back half of the year, particularly given that recession risks have intensified and are sweeping across the marketplace and weighing on sentiment,” said Candice Bangsund, portfolio manager at Fiera Capital.

Data on Friday showed the annual rate of eurozone inflation climbed to 8.6 per cent this month, up from 8.1 per cent in May.

“This sends an important message about what the European Central Bank should be doing,” said Florien Ielpo, head of macro at Lombard Odier Investment Managers. “They are likely to get tougher and tougher.”

Futures markets expect the eurozone central bank to end its long-held policy of negative interest rates by September and raise its main deposit rate to around 0.9 per cent by the end of the year.

The US Federal Reserve lifted its funds rate by an extra large 0.75 percentage points last month and is tipped to raise it to about 3.5 per cent by next March, in a tightening cycle that could tame inflation but will also raise companies’ borrowing costs. The prospect of more rises has already dented consumer confidence.

Economists now increasingly see the US and Europe tipping into recession. Last week, Fed chair Jay Powell admitted that a US economic downturn was “certainly a possibility” and avoiding it depended largely on factors outside the central bank’s control.

Corporate fundraising has cooled sharply, with businesses globally raising $4.9tn through new bonds, loans and equity in the first half of 2022, down 25 per cent from the record-setting $6.6tn raised in the first half of last year.

Elsewhere in markets on Friday, the yield on the 10-year US Treasury note, which underpins global loan pricing, ticked 0.02 percentage points higher to just under 3 per cent. Germany’s equivalent Bund yield fell 0.06 percentage points to 1.30 per cent as traders turned to the bonds of the eurozone’s largest economy as a haven asset.

The dollar index, which measures the reserve currency against six others, rose 0.3 per cent to $104.9.

Brent crude oil, which has been insulated from recession fears by predictions of a supply deficit as western powers move to exclude Russia from international trade, rose 2 per cent to $111.3 a barrel.

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