Monday Morning Minutes: False dichotomies

Another week on the edge for global markets after world stocks ended their steepest weekly slide since early days of the pandemic meltdown in March 2020.

Instead of a virus, the fear this time is inflation which has investors worried that tighter monetary policy and higher interest rates will damage economic growth, earnings and share prices.

Another public holiday today in the US will see Australian, Asian and European markets without any lead from America for a day, which will see local investors very cautious after the pounding last week in the wake of our holiday Monday.

Markets and confidence were whacked hard by the US Federal Reserve’s 0.75% rate hike – its largest since 1994 (and markets had been well warned by the Fed that it was coming); the first rate rise by the Swiss in 15 years with a half a per cent rise, a fifth rise in British rates since December and a move by the European Central Bank to bolster the indebted southern states like Greece and Italy (and reminding everyone that a rise of 0.25% happens in July).

Central banks in Hungary, Brazil and Taiwan also lifted their key rates.

Only the Bank of Japan sat on its hands on Friday sticking with its strategy of pinning 10-year yields near zero and accepting higher inflation (which the policy was supposed to do years ago) and 20-year lows for the yen.

After sharp early losses, world stocks steadied late in the day to end Friday’s session down by just 0.12%. The weekly slide of 5.8% was the steepest since the week of March 20, 2020 and that was echoed by falls in major markets (Australia saw a bigger fall).

The Dow slipped 38.29 points, or 0.13% to close the week at 29,888.78, while the S&P 500 gained 0.22% to close at 3,674.84.

The Nasdaq jumped 1.43% to 10,798.35 on Friday to go against the trend.

The S&P 500 closed down 5.8% for the week, with all 11 of its sectors finishing more than 15% below their recent highs.

That tells us the sell- off is broad based, reflecting mass concern among investors.

The Dow closed the week again under the 30,000-mark after dipping below that level on Thursday for the first time since January 2021.

The Dow lost 4.8% for the week, its 11th negative week in the last 12.

The Nasdaq Composite also slipped 4.8% for the week.

Eurozone shares fell 4.6%, Japanese shares fell 6.7% and Australian shares fell 6.6% with a small 19-point loss coming when trading resumes on the ASX Monday at 10am.

The Australian share market’s fall was led was by IT stocks (especially BNPL) which have been under pressure all year but also resources, retailers and financials as worries increased about the economic outlook.

The rising risk of global recession also led to falls in oil, metal and iron ore prices. Bond yields generally rose to new highs with the Australian 10-year bond yield rising above 4% for the first time since 2014.

The $A fell to around 69 US cents as the greenback rose. The Aussie dipped under the 70 US cents level twice in a week.

“Inflation, the war and lockdowns in China have derailed the global recovery,” economists at Bank of America said in a note to clients, adding they see a 40 per cent chance of a recession in the United States next year as the Fed keeps raising rates.

“We look for GDP growth to slow to almost zero, inflation to settle at around 3% and the Fed to hike rates above 4%,” BofA economists wrote.

The Fed made it clear on Friday to Congress that its commitment to fight inflation is “unconditional”.

That saw 10-year Treasury bond yields retreat to 3.229% after hitting an 11-year high of just shy of 3.50% during the week.

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Australian shares suffered their worst week since the pandemic-induced meltdown in 2020, tracking Wall Street on fears that aggressive policy tightening will trigger a recession.

The ASX 200 lost 1.76% on Friday to be down 6.6% last week and 13% year to date.

In Australia, miners led the losses for the day, declining about 2.8% amid weak iron ore prices in China.

Shares in Rio Tinto and BHP dropped 4.8% and nearly 4%, respectively. Fortescue shares also lost more than 5% on Friday.

For the week, the iron ore majors lost heavily with Vale of Brazil down almost 8% from the previous week, Rio Tinto shares lost 7% and Fortescue were down 12%. BHP shares also dropped more than 9% as iron ore prices hit six-month lows on Friday.

Australian fInancials slipped nearly 2.2% to their lowest close in more than a year for their third straight weekly loss.

Shares in the ‘Big Four’ banks fell between 1.8% and 3.6% on Friday. Commonwealth Bank shares were down almost 7% for the week, NAB shares lost 7.6%, ANZ shares were down 8% and Westpac shares fell 8%.

Gold stocks gained about 4% on Friday despite weak bullion prices. Newcrest Mining and Northern Star Resources rose 3.5% and 5.2%, respectively on the day.

Shares in GUD Holdings plummeted more than 19% on Friday and was the top loser in the index, after the automotive parts maker cut its annual forecast in an afterhours update on Thursday.