Global markets take a pounding as inflation reality spooks investors

London — Heavy falls in European and Asian stock markets on Thursday followed Wall Street’s worst performance since mid-2020 the day before, as stark warnings from some of the world’s biggest retailers underscored just how hard inflation is biting.

Bond markets rallied in the scramble for safety and on bets that interest rate rises may be reassessed, but it was the gloom striking down equities after Wednesday’s $25bn wipeout in US retailer Target’s shares that dominated the action.

Europe opened 1.8% lower, led by a 2.2% slump in its retail sector, while scarlet-red US futures and some sharp overnight drops in China tech firms put 1½-year lows back in focus for MSCI all-country world.

“Target and Walmart coming out with disappointing numbers has really, really spooked people,” said Robert Alster, Close Brothers Asset Management's CIO. “We are going to see a raft of downgrades to US GDP [forecasts] now ... it really looks like we are running into a faster slowdown than we expected.”

The S&P 500 lost 4% on Wednesday while the Nasdaq plunged almost 5% as interest-rate sensitive megacap stocks Amazon, Nvidia and Tesla plummeted almost 7% and Apple tumbled 5.6%.

MSCI’s broadest index of Asia-Pacific shares excluding Japan then snapped four days of gains as it slumped 1.8%, dragged down by a 1.65% loss for Australia’s resource-heavy index, a 2.5% drop in Hong Kong. Tokyo’s Nikkei shed 1.9%.

Tech giants listed in Hong Kong were hit particularly hard, with the index falling nearly 4%. China’'s online behemoth Tencent sank more than 6% after it reported zero revenue growth in the first quarter, its worst performance since going public in 2004.

China’s technology sector is still reeling from a year-long government crackdown and slowing economic prospects stemming from Beijing's strict zero-Covid policy, even though soothing comments from vice-premier Liu He to tech executives buoyed sentiment on Wednesday.

Focus on central banks

The focus remained on how central banks will walk the tightrope of trying to regain control of inflation, which is now at 40-year highs in some countries, without causing painful recessions.

Two US central bankers said they expect the Federal Reserve to shift to a more measured pace of policy tightening after July, but European markets were suddenly pricing in as many as four hikes by the ECB, which hasn't raised interest rates for a decade.

While matters haven’t reached the point of no return, they are seemingly heading in the direction of “out of control. That is probably the most worrying part for the market,” said Hebe Chen, a market analyst at IG.

In the currency markets, the dollar eased 0.3% against a basket of major currencies after a 0.55% jump overnight that ended a three-day losing streak.

The euro gained 0.4% on the ECB rate rise view, while the Aussie dollar gained 0.8% and New Zealand’s dollar bounced 0.6%, helped by an easing of Shanghai’s Covid lockdown.

US Treasuries rallied overnight and were bright at 2.84% in Europe, where the risk-adverse mood also saw Germany’s 10-year bond yield — which moves inverse to price — fall back below the closely watched 1% level.

Oil prices were also on the radar again as concern about slower economic growth outweighed lingering fears over tight global supplies.

Brent crude fell to $108.25 per barrel from $110.41 in London, while US crude dipped to $108.78 a barrel. Gold, which has fallen more than 12% since March, edged to $1,822 an ounce.

Reuters