Stocks and commodities slump on Fed and global growth jitters


Equities updates

Stocks and commodities sustained heavy falls on Thursday with investors darting into havens like the dollar after a jolt of concern over US monetary policy and signs of slowing global growth knocked investor sentiment.

Major European bourses slumped in afternoon action, with London’s FTSE 100 and the broad Europe Stoxx 600 both dropping close to 2 per cent and Frankfurt’s Dax down 1.8 per cent. The Cac 40 in Paris slumped 2.5 per cent. Across the region, luxury retailers such as Burberry, LVMH and Moncler sustained the steepest losses, alongside miners and airline groups.

Futures tracking the blue-chip S&P 500 fell 0.8 per cent ahead of Wall Street’s opening bell.

Traders also shifted out of other risky asset classes, leaving oil and metals prices with significant declines. Meanwhile, the dollar, considered to be a shelter in times of market jitters, lurched to its strongest level of the year with the index which measures the currency against six others up 0.3 per cent.

The gloomy trading session, which followed a 1 per cent drop on the US S&P 500 overnight, came after minutes from the Federal Reserve’s July policy meeting released on Wednesday indicated a majority of policymakers were prepared to begin easing the central bank’s vast stimulus programmes later this year.

Line chart of Indices rebased showing European stocks fall on taper fears

The Fed’s $120bn a month in asset purchases has been a key pillar in a powerful global equities rally from the depths of the coronavirus crisis in March 2020. However, as the US labour market has rapidly improved and inflation has risen sharply, central bankers are now planning their exit from the extraordinary measures.

“There was this suggestion of tapering sooner and faster among some FOMC members,” said Derek Halpenny, head of research for global markets at MUFG, a major financial services group. “I think that’s shaken up fragile sentiment. We are back to levels for the dollar we haven’t seen since late last year before vaccine breakthroughs set off the big risk rally.”

Concerns have also been building over the spectre of global economic growth peaking. Data from China, one of the main engines for world economic output, have suggested the increase in industrial production and other key gauges has been decelerating in the latter summer months.

A combination of the rapid spread of coronavirus across parts of Asia, supply-chain issues and regulatory moves by China to meet long-term pollution goals have all been a source for concern. Outbreaks of the Delta variant in south-east Asia coupled with microchip supply issues caused Toyota to reduce its global production for September by 40 per cent from its previous plan.

Commodity prices, which are particularly sensitive to the global growth outlook, extended a recent decline on Thursday.

Iron ore futures traded in Dalian were down 8.7 per cent at Rmb870 ($134.05) a tonne after touching their lowest intraday level in almost a year, data from Wind showed. The price of iron ore contracts has dropped about 44 per cent from a peak in May as signs of a slowdown in Chinese growth have mounted.

Copper, the world’s most important industrial metal, dropped 2 per cent to a five-month low below $9,000 a tonne. Brent crude, the global oil marker, slipped 3.4 per cent to $65.92 a barrel.

Meanwhile, currencies of smaller economies considered to be sensitive to global growth fluctuations, such as Norway and Sweden, fell against the dollar. Traditional havens such as the Swiss franc and Japanese yen inched up.

Investors have begun adopting a more defensive posture in recent weeks, according to data tracking flows to exchange traded funds. Global share markets have posted sizeable gains this year, with the broad MSCI All-World barometer up about 12 per cent.

However, some fund managers have become worried over how much further markets will rise, particularly after a blockbuster corporate earnings season set a high bar for the remainder of 2021.

“The economic backdrop isn’t bad, but I don’t think we’ve had the all clear. Growth is going to slow down in the second half of the year even before you consider the impact of the Delta variant,” said Peter Schaffrik, global macro strategist at RBC Capital Markets.

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