Global equities started the second half of the year lower as investors saw no end to the inflation and interest rate pressures that pushed Wall Street to its worst first-half performance for more than half a decade.
The FTSE All World index of developed and emerging market shares fell 0.7 per cent on Friday morning, having declined by a fifth this year. Europe’s regional Stoxx 600 equity gauge opened 0.9 per cent lower, following a 16 per cent drop in the past six months.
Futures trading also implied Wall Street’s S&P 500, which fell by a fifth in the first six months of this year, would notch another 1 per cent decline on Friday. US equities, which set the tone for trading worldwide, have not endured such a punishing first six months of a year since 1970.
Investors have herded out of risky assets in recent months after a surge in global inflation driven by delay to supply chains during the coronavirus pandemic. That has been exacerbated by Russia’s invasion of Ukraine and pushed global central banks to rapidly end monetary policies that had encouraged economic growth and borrowing.
“We expect this volatility to extend itself into the back half of the year, particularly given that recession risks have intensified and are sweeping across the marketplace and weighing on sentiment,” said Candice Bangsund, portfolio manager at Fiera Capital.
Meanwhile, analysts’ expectations for companies’ second-half earnings “remain quite lofty,” she said. “So here is where we see some further vulnerability.”
The US Federal Reserve lifted its main interest rate by an extra-large 0.75 percentage points last month and is tipped to lift it to around 3.5 per cent by next March, in a tightening cycle that could tame inflation but will also raise companies’ borrowing costs. The prospect of more rises has already dented consumer confidence.
Economists increasingly see the US and Europe tipping into recession as central banks on both sides of the Atlantic lift borrowing costs, and gas supplies to Europe from Russia remain uncertain in the run-up to winter. Last week, Fed chair Jay Powell admitted that a US economic downturn was “certainly a possibility” and avoiding it depended largely on factors outside the central bank’s control.
Corporate fundraising has cooled sharply, with businesses globally raising $4.9tn through new bonds, loans and equity in the first half of 2022, down 25 per cent from the record-setting $6.6tn raised in the first half of last year.
In government bond markets on Friday, the yield on the benchmark 10-year US Treasury note was flat at 2.96 per cent. Germany’s equivalent Bund yield fell by 0.01 percentage points to 1.35 per cent. Bond yields move inversely to prices.
The dollar index, which measures the reserve currency against six others, rose 0.1 per cent to $104.9.
Brent crude oil, which has been insulated from recession fears by predictions of a supply deficit as western powers move to exclude Russia from international trade, fell 0.4 to $108.60 a barrel.
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