Global Economics

Shares plummet amid worst downturn since January

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On Wednesday, investors scrambled to stop the bleeding after global markets experienced their worst drop since January, while U.S. and European borrowing costs soared to their highest levels in months. Asia managed to moderate the declines, while the Pan-European STOXX 600 index rose 1% in early trading after falling 2.2 percent on Tuesday and after all three major Wall Street indexes fell the most since mid-July. (N)

The global borrowing cost benchmarks – the rates on US and German government bonds – moved lower, as traders awaited comments from the leaders of the European Central Bank, the US Federal Reserve, the Bank of Japan, and the Bank of England. “The question that will come in the next 10 days is will the U.S. Treasury yield keep pushing above 1.5%,” said Societe Generale (OTC:SCGLY) strategist Kenneth Broux. “That was a sort of breaking point for broader risk assets when stops went off and the selloff started accelerating.”

Broux stated that the question for October and the remainder of the year will be whether or not inflationary pressures began to ease. “The 1.5 percent (on US Treasuries) level is absolutely critical,” he said. In currency markets, the dollar reached an 18-month high against the yen, as well as its highest level of the year vs other major peers, as yields rose in response to hints that the Fed intends to begin reducing stimulus by the end of the year. Doubts about the global economy are resurfacing at a time when the Fed is poised to reduce assistance and the US administration is mired in debt-ceiling negotiations that could lead to a government shutdown. China is likewise dealing with a power shortage that has harmed its economy. MSCI’s broadest index of Asia-Pacific shares outside Japan plummeted 0.84 percent, putting it on track for a 9.4 percent drop in the third quarter, its worst quarterly performance since the first three months of 2020, when global markets were roiled by the initial spread of COVID-19. World equities are on track for their first negative quarter since the peak of the COVID panic, while the dollar is on track for its best year since 2015 and gas and oil prices have risen.

Coffee is up 25% for the second quarter in a row. The Baltic Dry index of global freight prices has increased by 40%, following increases of 50% and 65% in the previous two quarters, while China’s difficulties have caused iron ore to fall by 45 percent, making this the worst quarter on record.

“We still see inflation as a risk, but our base case is that it will be transitory and come back to more normal levels during next year,” said Osman Sattar, S&P Global (NYSE:SPGI)’s Director for EMEA Financial Institutions. But companies face pressure on margins as higher energy prices are locked into next year’s bills.