Stock crash wipes $500bn from market
Global stocks were in a sea of red on September 14 as markets were bracing for even more aggressive US Federal Reserve policies aimed at curbing inflation.
The major stock indices such as the S&P plunged into negative territory. Yet even as the market crashed, a swift rebound followed soon after.
We take a look at the volatile stock market and make sense of the market madness.
Many firms and investors are realising the fight against inflation will be a long, hard battle.
All three major US stock indexes reported their biggest single-day percentage declines on September 13, the biggest dip since the major crash in June 2020. A poor US consumer price index report rattled the market coupled with fears that the Federal Reserve will conduct its third straight 75 basis-point rate increase later in September.
The crash saw nearly half-a-trillion dollars wiped from the market. Many analysts are currently pricing in a 37% chance of a huge 100 bps increase by the central bank. It’s expected that rates could peak at 4.34% by March 2023.
On September 14, stock futures tied to the Dow Industrial Average were down 43 points (-0.1%), S&P 500 futures dropped 0.1% and Nasdaq 100 futures declined by 0.2%.
By contrast, the Dow plummeted more than 1,200 points on September 13 (-4%), S&P 500 lost 4.3% and Nasdaq Composite dropped 5.2%.
The inflation report rattles the market
The crash comes after the US consumer price index report for August 2022. It revealed inflation rose 0.1% monthly despite a drop in gas prices.
The high inflation report caught the market off guard considering the decline in gas prices. It was expected that inflation had leveled off and wouldn’t be climbing higher. Instead, the rate hike increase caused a panic with a resulting mass sell-off, especially in the tech sector.
One of the hardest hit sectors was communications services. The sector dropped 5.6% to finish its worst day since February 2022. Major indices were dragged down by declining shares of major technology companies such as Netflix and Meta Platforms, which crashed by 7.8% and 9.4%, respectively.
Yen gains strength, EU stocks dip
US market jitters allowed forex traders to push the Japanese to their strongest level yet. The yen has rallied to around 143 per dollar
The yen rallied by more than 1%, propelling it out of its recent 24-year lows versus the US dollar. Another factor at play for the Yen is a report that the Bank of Japan is conducting a rate check to aid the struggling currency.
Why should the world be concerned by US data? The US consumer data reverberated globally as many markets fell.
European shares dropped 0.6%, retreating from an almost three-week high achieved on September 13. The British FTSE slid 1% despite data showing that UK inflation fell unexpectedly during August 2022.
In Asia, Japan’s Nikkei crashed by 2.6%, and MSCI, the broadest index of Asia-Pacific shares, saw a decline of 2.2%.
The outlook for further aggressive rate hikes has boosted the US dollar. The rise in the greenback has hurt major central banks that have seen their currencies weaken as a rise in the US dollar will fuel inflation.
In commodities, the US is up 0.8% at $87.98 per barrel and Brent was trading at $93.80. Gold continues to struggle, trading at around $1,705 per ounce.
Raising costs curbs consumer spending
US consumer prices rose and underlying inflation rose in August. As rising costs for goods and services increase in the US, the Fed reportedly will intervene with a 75 basis points interest rate hike later in September.
The US Labour Department had reported ease in global supply chains yet despite this inflation continues to be a factor. Global supply chain disruption contributed to a major surge in prices earlier in 2022. The US Labour Department had reported a resilient labor market and strong wage growth, good news for local workers.
The US consumer price index increased by 0.1% in August. US consumers have received some relief in the form of a 10.6% decline in gasoline prices but overall are being forced to pay more for food, rent, energy, and healthcare. Of major concern is the rising price of natural gas, especially in Europe.
A major issue for all consumers is the rising cost of food; The US Department of Agriculture reports that food prices have surged by 11.4% in 22. This curbs consumer spending and ultimately hurts the US economy.
The European Union said it plans to raise more than $140 billion to help consumers experiences soaring energy prices.
Inflation affecting the global economy
During the first six months of 2022, the focus of increasing inflation was on fuel. Global fuel prices rose rapidly as Russia was hit by severe sanctions following its invasion of Ukraine. Since then, however, fuel prices have been reduced yet inflation has affected many other sectors of consumer spending.
Food, rent, and medical services were the primary sectors pushing the August CPI report.
New vehicle prices and medical care services both increased 0.8%. Inflation directly affects consumer spending habits – if the price of new vehicles is too high, demand will drop and the auto sector suffers.
Globally, buying power is diminished with high inflation and high rate hikes, and lower investor confidence.
Higher oil prices are possible
Energy prices are a major concern, especially in Europe. Russia has shut down its major natural gas pipeline to Europe which has resulted in sky-high gas prices.
The oil price is also troubling; the G-7 nations intend to implement price controls on Russian oil exports in December. Fears of possible retaliation from Moscow could see late-year price increases.
Should Russia cut off all natural gas and oil exports to the EU, USA, and UK, then it is highly likely that oil and gas prices will surge. The commodity market has already seen the results of a major disruption to the oil price from Feb-March 2022 when oil reached its highest levels in a decade.
With the world gripped by rampant inflation, the big economic question – is how far will central banks hike rates and how long can the global economy sustain both.
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