Stock markets declined on Tuesday as investors were divided between fears that the US Federal Reserve would maintain its aggressive anti-inflation measures and growing optimism over China’s economic reopening. Meanwhile, oil prices declined, with Brent crude falling below $80 for the first time since January, when prices began rising before Russia’s invasion of Ukraine.
Stock markets in London, Frankfurt and Paris closed with losses, following mostly losses in Asia. Wall Street extended losses in morning trade following the previous day’s selloff. Data showing a forecast-busting jump in activity in the US services sector last month raised the prospect that the Fed will not hold back on a sharp rate hike when it meets next week.
Monday’s data followed strong jobs data last week and a jump in wages that gives the central bank more room to cool the US economy. Michael Hewson, market analyst at CMC Markets, said the strength of the services sector data “upset the conventional wisdom that inflation could come down very quickly, given the resilience of the numbers, as well as the wage increase seen in Friday’s payrolls”. Rebound report good.”
This has again left investors fearful about what the Fed will do and the possibility that it could push the US economy into a deep recession to ease inflation. “Worries that the Fed could unwrap the unwanted gift of another super-sized rate hike when policymakers meet next week are sprinkling Christmas fears on indices,” said Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdowne. Huh.”
“Speculation is swirling that central banks will have to be more Scrooge-like and make borrowing more expensive to rein in inflation,” he said. Boss Jerome Powell said the bank could raise rates at a slower pace.
Borrowing costs are set to rise by more than five per cent next year – from the current range of 3.75-4.0 per cent – before the bank halts, with no cuts until 2024. “Go ahead and trigger a deep economic shock,” said Briefing.com analyst Patrick O’Hare.
Analysts said concerns over the Fed easing China’s zero-Covid policies followed nationwide protests over the measures, which have hit the world’s second-largest economy. Crude oil prices fell as EU sanctions on Russian oil and a G7-EU price cap on the country’s exports came into effect on Monday, despite the prospect of higher oil demand in China as the economy reopens.
“It seems like the only volatility guaranteed in the oil market for now,” said Craig Erlam, analyst at the OANDA trading platform. Markets have been swayed by volatility over price caps and concerns about global demand as central banks hike interest rates.
Hewson of CMC Markets said traders were also skeptical about how much of an economic boost the Chinese measures would provide. “Expectations of a demand boost from China’s reopening are tempered by the realization that any recovery will be muted at best while infection rates remain high,” he said. The dollar declined against other major currencies after gains on Monday.
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