The war in Ukraine has tended to increase uncertainty regarding inflation and growth prospects. When and with what consequences this war will end is pure speculation, but capital markets are expected to build a certain immunity to the headline risks in the coming weeks. The medium- to long-term consequences, on the other hand, could be significant. It is possible that we are at the beginning of a new bloc formation or a new Cold War. This would put a significant damper on globalization and further fuel higher structural inflation.
With bond yields soaring and aggressive tightening by various central banks, financial markets have just experienced a second consecutive week of sharp declines, weighed down by geopolitical tensions and fears of recession. On Friday, the Dow tumbled below the key 30,000 mark to close at levels not seen in almost two years, while the S&P 500 and the Nasdaq lost 1.7% and 1.8%, respectively. Energy shares fell the most on the day, down 6.3% as crude prices collapsed. The Dow lost 4% this week, while the S&P and the Nasdaq fell 4.7% and 5.1%, respectively. In Europe, equity markets all fell sharply on Friday, with the Euro Stoxx 50 down 2.3% to its lowest level so far this year, as growth worries dampened sentiment once again following weak flash PMI data.
Summary
- Shares in Asian fell sharply on Monday as negative sentiment continues to weigh in on markets. The Nikkei 225 dropped 2.4%, the Kospi was down 2.7%, while the ASX 200 declined by 1.2%. More contained were the losses experienced by the Hang Seng and the Shanghai Composite, which were only fractionally lower.
- European equities are on course for another day of declines as US investors prepare for the S&P 50 to test its June low.
- Oil prices rose modestly in early trade on Monday after losing as much as 7% last week, weighed down by a surging US dollar and fears that sharp interest rate hikes globally would spark a recession and hit fuel demand. This prompted speculations that OPEC+ may consider intervening in the crude markets again by cutting supply further.
- The PBoC will impose a risk reserve requirement of 20% on bank’s foreign exchange forward sales to clients starting from Wednesday. The move comes amid efforts by the central bank to slow the pace of the yuan’s recent depreciation, making it more expensive to bet against the currency. The reserve ratio has been zero since 2020.
- Japan’s Manufacturing PMI decreased to 51.0 in September from a final 51.1 in August, a preliminary reading showed. While marking the 20th month of expansion in the sector, the latest figure was the lowest since January 2021, amid growing economic headwinds and the impact of adverse weather.
- Sterling tumbled nearly 5% to an all-time low of 1.0327 compared to the USD, after the government announced several tax cuts in an attempt to boost economic growth. The plan includes the cancellation of a planned rise in corporation tax to 25%, keeping it at 19%, and a reversal in the recent 1.25% rise in National Insurance contributions. The government estimates the tax cuts will total £45 billion by 2026-27, but investors worry that public debt levels will soar.
- Giorgia Meloni and her far-right Brothers of Italy won a clear majority in Sunday’s Italian election, setting herself up to become the country’s first female prime minister. Her alliance, which also includes Matteo Salvini’s League and Silvio Berlusconi’s Forza Italia, claimed about 43% of the vote, according to projections from RAI.
- President Joe Biden’s administration has privately told the Kremlin that any use of nuclear weapons in the war in Ukraine would have “catastrophic consequences” for Russia, White House National Security Adviser Jake Sullivan said.
- On Friday, Costco reported higher revenue and earnings for the fourth quarter, beating expectations, but gross margins declined during the three-month period as inflation drove up costs. Shares dropped 4.3% in regular trading.
- In the US, the attention will be taken by several speeches by the Fed officials and the release of the PCE price index and personal income and spending. In Europe, investors will be looking for flash inflation rate figures for the Euro Area including Germany, Spain, France, and Italy, and several business confidence indicators including the ifo Business Climate Index.