Markets drop as Fed worries offset China’s COVID easing

The Nation  |  Dec 07, 2022

Paris-Stock markets mostly fell on Tuesday as fears that the US Federal Reserve will maintain its aggressive anti-inflation measures trumped growing optimism over China’s economic reopening.

London, Paris and Frankfurt were all in the red at around midday. Asian markets were mostly down after all three main indexes on Wall Street lost more than one percent the day before. Data showing a forecast-busting jump in activity in the US services sector last month raised the prospect that the Fed will not back down from sharp rate increases when it meets next week. Monday’s data followed robust jobs figures last week that could give the central bank more room to manoeuvre, fuelling investor concerns that the Fed’s actions could tip the economy into recession.

“Worries that the Fed could unwrap an unwelcome present of another super-sized rate hike when policymakers meet next week are sprinkling Christmas fear on indices,” said Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown. “Speculation is swirling that central banks will have to be more Scrooge-like and make borrowing even more expensive to rein in inflation,” she said. Markets had been running higher ahead of the jobs figures after a surprise drop in inflation and comments from Fed boss Jerome Powell that the bank was likely to raise rates at a slower pace.

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“Outstanding news from the vast services-based US economy is devastating for market participants keen to see evidence of the US economic disintegration,” said SPI Asset Management’s Stephen Innes.

Bets have increased on borrowing costs rising higher than five percent next year— from the current range of 3.75-4.0 percent— before the bank pauses, with no cuts seen until 2024.

Investors have also been tracking China’s zero-COVID policies, which have hammered the world’s second-biggest economy.

Hong Kong dropped after soaring around 15 percent over the past week on China’s easing of strict COVID containment measures.

The dollar lost ground against other major currencies after gains on Monday.

Crude prices fell more than one percent over concerns that higher interest rates could slow the global economy, which would affect oil demand.

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