Global stocks suffered their worst weekly fall since the early days of the pandemic as central banks acknowledged that tacking inflation would lead to economic pain. Global bond yields rose sharply as investors priced in more aggressive rate rises. Even crypto currencies were not immune from the sell-off with Bitcoin dropping below $20,000 for the first time since November 2000.
The FTSE 100 declined 4.1% over the week.
The Bank of England raised rates by 25bps to 1.25% and warned that the inflation rate may rise above 11% later this year. However, fears are rising that the Bank has gone soft on inflation given the larger rate rises seen elsewhere.
The UK economy contracted 0.3% over the month of April.
The S&P 500 plunged 6.4% over the week while the tech-heavy Nasdaq dropped 5.4%.
The US Federal Reserve raised rated by 75bps, marking its biggest move of this magnitude since 1994 and taking US interest rates to a range of 1.5-1.75%. While Fed chair Jay Powell said he expected rises of this magnitude to be relatively uncommon, he indicated there was likely to be another substantial rate rise in July (50 or 75 bps) at which point interest rates would be close to “more normal” levels. The Fed has also started quantitative tightening as it has stopped reinvesting the proceeds of its holdings of maturing Treasuries back into the market.
The FTSEurofirst 300 fell 4.5% over the week.
The European Central Bank promised a new “anti-fragmentation instrument” to support weaker eurozone nations from rising interest rates.
The Swiss National Bank raised rates for first time in 15 years, raising rates by 50 bps to -0.25% after inflation hit a 14-year high of 2.9% in May.
The German government asked citizens to conserve energy after Russia cut gas supplies through the Nord Stream pipeline by 60%. Italian gas supplies from Russia have been cut by 15%.
Hungary blocked the EU’s progress towards implementing a global minimum rate of corporation tax.
German, French and Italian leaders pledged to back Ukraine’s bid for EU membership.
The Nikkei 225 tumbled 6.7% over the week.
In stark contrast to central banks elsewhere, the Bank of Japan kept interest rates at -0.1% and said it would continue to buy government bonds to ensure the 10-year JGB yield didn’t exceed 0.25%.
Fears that Australia could suffer power outages escalated, forcing the country to take control of the wholesale market to ensure reliable supply of electricity to eastern states. Consumer in New South Wales were asked to turn off lights and avoid using white goods in the evening to conserve energy. Emergency powers will allow authorities to block coal exports if the resource is needed domestically.
The yield on the 10-year US Treasury bond closed the week up 30 basis points at 3.32%, having touched an 11-year high of almost 3.5% mid-week. The yield on the two-year Treasury note touched a 15-year high of 3.45% before closing the week at 3.19%.
The yield on higher quality, US investment-grade bonds neared 5%, a level last seen in the aftermath of the global financial crisis in 2009. Yields on US high-yield bonds have also moved sharply higher as cashflows turn steeply negative.
The yield on the 10-year German Bund rose 28 bps over the week to close at 1.71%. Italian 10-year bond yields rose as high as 4.2% and yield spreads over Germany moved above 240 bps before falling back after the ECB announced it would take measures to protect weaker eurozone nations from rising rates. The Italy-German 10-year spread closed the week at 217 bps while 10-year Italian yields ended around 3.6%.
The yield on the 10-year UK Gilt closed the week at 2.51%, an increase of 19 bps over the week.
The Japanese yen fell to a 24-year low against the US dollar amid expectations the Bank of Japan would maintain its dovish stance.
Oil prices eased on concerns that aggressive central banks’ actions could slow economic growth and squeeze crude demand. Brent crude closed the week at $113.12 a barrel.