LONDON: Equities and oil prices tumbled Wednesday after a brief respite from last week’s painful rout across world markets, with recession fears building as central banks hike interest rates to combat decades-high inflation. While Asia, Wall Street and Europe all enjoyed healthy gains Tuesday, analysts warned the downbeat mood on trading floors means the selling is unlikely to end any time soon.
Federal Reserve boss Jerome Powell’s two-day testimony to Congress this week will be pored over for an idea about officials’ plans for fighting runaway prices, which are being fanned by supply chain snarls, China’s lockdowns and the war in Ukraine. Most observers expect the Fed to aggressively hike US interest rates several more times this year having recently carried out the sharpest lift in almost 30 years. The prediction is handing support to the dollar, which pushed the yen briefly to a fresh 24-year low Wednesday.
The Bank of Japan is holding back from lifting interest rates, in sharp contrast to other major central banks. “Swiftly rising interest rates act as a vacuum for economic growth, and this isn’t lost on the market today,” noted Sophie Lund-Yates, equity analyst at Hargreaves Lansdown. “This is a darker day for global markets than has been seen in a while. Serious questions remain about the resilience of consumers, and it appears traders are bracing for a harsh hand where interest rates are concerned.”
Oil prices were feeling the heat from recessionary fears, with both main contracts tanking more than five percent at one point. Crude and gas prices have soared in recent months after major economies lifted pandemic lockdowns and following the invasion of Ukraine by major energy producer Russia. Surging energy costs are fuelling global inflation, with official data Wednesday showing the British annual rate hitting a fresh 40-year high above nine percent.
In the United States, President Joe Biden will Wednesday ask Congress to suspend the federal gas tax for three months as skyrocketing prices cause widespread anger among Americans just months before crucial mid-term elections. The White House wants to discontinue the 18 cents per gallon tax until September and will call on state governments to do the same. A senior administration official noted that US gas prices – averaging near $5 per gallon – had jumped almost $2 since Russian President Vladimir Putin began building up forces on the Ukrainian border earlier this year.
Meanwhile, Britain’s exit from the European Union will further slash workers’ wages in coming years, a study concluded Wednesday as the nation already faces a cost-of-living crisis from soaring inflation. The research, from the Resolution Foundation think tank and the London School of Economics, was published as official data showed UK inflation hitting a new 40-year peak at 9.1 percent.
And Wednesday’s report claimed that Brexit had hit the UK economy’s openness and competitiveness abroad. As a result, household incomes—already under intense pressure from rocketing inflation—were forecast to slide further. “It will take many years for the economy to adjust … but the aggregate effect will be to reduce household incomes as a result of a weaker pound, and lower investment and trade,” the report read.
A weaker pound had also ramped up import costs, it added. The report forecast that Brexit would cause a 1.8-percent drop to real wages—or earnings adjusted for inflation—by the end of the decade. That equated to a loss of £470 ($577) per worker per year, it added. “Brexit is not… expected to transform the nature of the UK economy,” the report concluded. “Instead, the impact of Brexit is better thought of as a broad-based reduction in workers’ pay and productivity.” – AFP