Global market storm gathers force as virtually no asset class is spared

Global markets came under more pressure on Friday as sentiment turned sour over the global economic outlook. Equities, currencies, other asset classes – hardly anything has been spared in the economic turbulence of recent weeks. Here’s what economists and analysts are eyeing this trading day:

Markets in transition

Indices fell across the board in Friday trading. The S&P TSX Composite Index fell over 2.5 percent in the first hour to 18,516 as energy stocks fell to their lowest levels in over two months and oil prices fell 6 percent.

The US markets fared no better. The S&P 500 fell about 1.7 percent to 3,692 by 10:40 a.m. ET and the Dow Jones slipped 1.5 percent to 29,616. Goldman Sachs Group Inc. lowered its target for the S&P 500 Index from 4,300 to 3,600 by the end of the year, suggesting a shift in interest rate expectations and their impact on stocks.

Friday’s turmoil began in European and Asian markets.

“There is no risk appetite this Friday morning as stocks across Europe fall as much as 3 percent, led by the FTSE MIB,” BMO economists Jennifer Lee and Shelly Kaushik said in their morning note. “Asia was not spared as the region sold off broadly, with the Hang Seng shedding over 1 percent while the CSI 300 held losses at 0.3 percent.”

The strategists at Bank of America Corp. indicate a “cash is king” attitude among investors, who are demonstrating the most pessimistic attitude towards the markets since the 2008 global financial crisis. Cash inflows reached $30.3 billion, while global equity fund outflows were $7.8 billion, bonds lost $6.9 billion and gold investments for the week ended September 21, according to the bank decreased by US$400 million.

Canadian retail slump

The latest retail sales data from Canada also disappointed on Friday, with July sales falling 2.5 percent as lower gasoline prices contributed to the decline. While Canadians saved money on fuel, the cash windfall didn’t go to other retailers, Royce Mendes, Desjardins’ managing director and head of macro strategy, said in a note following the data. Mendes also said the modest recovery of 0.4 percent in nominal retail sales that Statistics Canada estimates for August could point to higher volumes.

“Nevertheless, the trend is clear, consumers are withdrawing their spending,” said Mendes. “The slowdown in consumption is exactly what the Bank of Canada is trying to achieve with its rate hikes.”

The Bank of Canada aims to rebalance high demand with limited supply by conducting an aggressive rate hike cycle this year, which has raised interest rates by three percentage points so far.

pound tumbles

Across the pond, the British pound fell 2 percent to plunge below $1.11 for the first time since 1985, adding to the pressure the currency was facing earlier in the week. The slump came as newly appointed British Prime Minister Liz Truss introduced the country’s biggest tax cuts since the early 1970s.

Karl Schamotta, chief markets strategist at Cambridge Global Payments in Toronto, said recent weak retail data has exacerbated fears of a deep and prolonged recession and contributed to the pound’s sadness.

The Bank of England raised interest rates by 50 basis points to 2.25 percent this week, which Schamotta said ahead of the decision would help widen interest rate differentials against the pound.

Don’t fight the Fed. Simply not

Federal Reserve Chairman Jerome Powell reiterated his statements in Jackson Hole in late August that the central bank was willing to limit economic growth if it meant stamping out decades of high inflation. The Fed’s 75 basis point hike earlier this week showed Powell wasn’t bluffing, as detail economist David Rosenberg of Rosenberg Research & Associates Inc. was quick to point out.

“What part of ‘don’t fight the Fed’ don’t the markets understand?” Rosenberg asked in his note to clients Friday morning. “Chairman Powell’s message is clear: the Fed is serious this time, and this isn’t about direction or fooling around.”

“Whether the Fed is ultimately right or wrong in what it does, it controls the ‘magic lever,’ so investors should be prepared for further economic and market weakness,” Rosenberg added.

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