Global stocks closed lower on Thursday, after pulling back from session lows, on growing concerns that the stronger-than-expected U.S GDP and the resilient labor market would lead the Federal Reserve to keep hiking interest rates for longer than investors may have hoped to fight the four-decade record high inflation.
U.S. stocks extended losses yesterday and the U.S. dollar rebounded from monthly lows after an upward revision to U.S Q3 GDP for 3.2% annualized growth, above the previous estimate of 2.9%, underscoring U.S. economic resiliency amid the Fed’s battle against inflation.
While an upward revision of the GDP would normally be viewed as a positive catalyst for the markets, amid the Fed’s tightening phase it triggers market participants’ fear that the Fed’s funds target rate could rise higher and stay there longer than previously expected, raising the possibility of an economic contraction in 2023.
The selling pressure on stocks resumed yesterday as economists and traders remained concerned that further monetary tightening from central banks around the world will push the economy into a recession.
Rate-sensitive and high-growth tech stocks led the losses on concerns for softening demand and the hawkish stance by Fed, with tech-heavy Nasdaq Composite settling 2,20% lower on Thursday, ahead of the third week of losses in a row.
Nasdaq Composite, Daily chart
The Dow Jones index dropped 349 points, or 1.05% to 33,027, after falling as much as 803 points earlier in the session, almost writing off the +1,5% gains on Wednesday after the better-than-expected earnings from Nike and FedEx.
The S&P 500 index declined 1.45% last night and is on track for a nearly 20% annual drop so far, which would be its biggest since the 2008 financial crisis.
With the end of December around the corner, Dow Jones is down 4.5% on the month so far, while the S&P 500 and Nasdaq have tumbled 6.3% and 8.7%, respectively.
All three major averages are lined up to break a 3-year win streak and post their worst yearly performance since 2008, driven by the recession fears and the aggressive tightening and rate hiking by Fed to curb the inflationary pressure.
Asian markets also ended lower on Friday morning, taking the lead from the overnight losses on Wall Street. Japan’s Nikkei 225 and Chinese indices fell as much as 1% during the session before ending much higher heading at the closing bell.
Financial markets extended losses last week as investors were concerned over the hawkish stance and the aggressive policy tightening by major central banks despite growing recession worries, at a time an unprecedented spike in COVID-19 cases in China increases fears for a delayed reopening in the country.
Appetite for risky assets eased last week after hawkish signals from the Federal Reserve, Bank of England, and European Central Bank triggered concerns that rising interest rates, a sharp increase in borrowing costs, and persistently high inflation could spark an economic slowdown or a recession in 2023.
The three central banks delivered a smaller 50-basis point rate hike last week, flagging more increases to come, and projecting that interest rates would likely peak at higher-than-expected levels in 2023, hampering economic growth and weighing on the market risk sentiment.
U.S. stocks suffered a second straight week of losses last Friday, with Dow Jones falling by 1.66% for the week, the S&P 500 dropping 2.09% and the tech-heavy Nasdaq Composite tumbling 2.72%, as fears continued to mount that the Fed’s aggressive tightening will slip the U.S. economy into a recession.
Nasdaq Composite, 1-hour chart
Asian-Pacific markets ended the first day of the week that is leading up to the Christmas holidays in red, with Chinese stocks leading the losses by nearly 1% on worries over the rising Covid-19 in the country after it scaled back several strict lockdown measures earlier in December.
However, as we got into European Monday’s trading, market sentiment improved as the fears for the rate hike outlook were offset by the falling dollar and bond yields, with Euro climbing back to $1,0650 a dollar, and the U.S. stock futures turning positive by 0,50%.
Both Brent and WTI crude oil prices added another 1% this morning to $80/b and $75/b respectively, extending last week’s gains of 3% on a supply disruption of the pipeline (with 620k bpd capacity ) that connects Canadian crude producers to U.S. refiners, on China’s reopening optimism, and after the news by the U.S. Energy Department on Friday that it will begin repurchasing crude oil for the Strategic Petroleum Reserve (SPR).