Global markets fall sharply on worries about rates, economy

BEIJING Stocks fell worldwide Friday on further signs that the global economy is in decline, as central banks increase the pressure with more interest rate hikes.

The S&P 500 dropped 2% in afternoon trading, adding to a difficult week. It is close to the low point of the year, in mid-June.

European stocks dropped just as much or more after preliminary data showed that business activity experienced its worst monthly contraction since 2021.. A new plan to reduce taxes was announced in London, adding to the pressure. This could force the U.K. central bank to raise rates sharply.

The Federal Reserve and other central bank around the world increased interest rates aggressively this week in an effort to lower high inflation. More big increases are promised for the future. However, such moves can also slow down their economies, which could lead to recessions as global growth slows. A separate report, which also included discouraging data about European business activity, suggested that U.S. activity is still declining, although not as severely as in previous months.

“Financial markets are now fully absorbing the Fed’s harsh message that there will be no retreat from the inflation fight,” Douglas Porter, chief economist at BMO Capital Markets, wrote in a research report.

Crude oil prices fell to their lowest level since early this year due to fears that a weaker world economy would burn less fuel. Higher interest rates are a reason why cryptocurrency prices fell sharply. This is because the investments that seem most risky or expensive tend to be the most vulnerable.

Even gold fell during the global rout. Higher yield bonds make investments that pay no interest less attractive. The U.S. dollar has been rising sharply against other currencies. This can lead to lower profits for U.S. businesses with a lot of overseas business and financial pressure on many countries in the developing world.

The Dow Jones Industrial Average fell 505 points, or 1.7%, to 29,572 and the Nasdaq fell 1.9% as of 3: 43 p.m. Eastern. Smaller company stocks did even worse. The Russell 2000 dropped 3%. U.S. crude oil prices fell 5.7%, weighing heavily on energy stocks.

More stocks in the S&P 500 were red than , with technology companies and banks being the largest weights on this benchmark index. The major indexes are currently on track for their fifth weekly loss in six months.

The Federal Reserve on Wednesday lifted its benchmark rate, which affects many consumer and business loans, to a range of 3% to 3.25%. It was almost zero at the beginning of the year. The Fed also released a forecast that its benchmark rate could rise to 4.4% by year’s end. This is a full point higher then what was expected in June.

Treasury yields are at multiyear highs due to rising interest rates. The yield on the 2-year Treasury rose to 4. 19% from 4. 12% late Thursday. It is trading at its highest levels since 2007.. The yield on the 10-year Treasury, which influences mortgage rates, slipped to 3. 68% from 3.71%. The higher rates indicate that Goldman Sachs strategists believe most clients now see a “hard land” that causes the economy to fall sharply as inevitable. Their concern is not with the length, timing and magnitude of a possible recession.

While higher interest rates can hurt all types of investments, stocks could remain steady as long as corporate profits rise strongly. Many analysts are beginning to reduce their earnings forecasts due to higher interest rates and fears of a recession.

“Increasingly, market psychology has transitioned from concerns over inflation to worries that, at a minimum, corporate profits will decline as economic growth slows demand,” said Quincy Krosby, chief global strategist for LPL Financial.

The U.S. jobs market is remarkably strong. Many analysts believe that the economy grew in the second quarter of this year after shrinking in six months. The encouraging signs suggest that the Fed may need to raise rates to cool inflation.

Key areas of the economy are already deteriorating. Mortgage rates have reached 14-year highs, causing sales of existing homes to drop 20% in the past year. Other areas that perform well when rates are low are also suffering.

In Europe the already fragile economy is struggling to cope with the effects of war in its eastern front after Russia’s invasion. The European Central Bank is increasing its key interest rate to combat inflation, even though the region’s economy is expected to plunge into recession. China’s economy is also struggling with tight measures to reduce COVID infections, which can also be detrimental to businesses.

While Friday’s economic reports were disappointing, Wall Street didn’t see them as enough to convince central banks and the Fed to ease their stance on increasing rates. They only reinforced the fear that rates would continue rising despite already slowing economies.

—-

Economics Writer Christopher Rugaber and Business Writers Joe McDonald and Matt Ott contributed to this report.