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Monday, July 4, 2022

Wall Street falls again after brief respite

NEW YORK ( Associated Press) – Markets around the world fell back on Thursday, and Wall Street is down nearly 3% in a sweeping wipeout as worries about a fragile economy loom back.

The S&P 500 was down 3.3 percent in afternoon trading, more than reversing its blip of a 1.5 percent rally from the day before. Analysts had warned of more large volatility, given deep uncertainties about whether the Federal Reserve and other central banks could follow the narrow path of raising interest rates to keep inflation under check. Not that they cause a recession.

The Dow Jones Industrial Average was down 755 points, or 2.5 percent, at 29,911 as of 12:09 p.m. Eastern Time, and the Nasdaq Composite was down 4.2 percent. The S&P 500 was on track for its sixth loss in the past seven days, and all but five of the 500 companies in the index were lower.

Read more: What is the yield curve and how can it warn of the next recession?

Wall Street fell along with stocks across Europe after central banks raised interest rates by the Federal Reserve on Wednesday. The Bank of England raised its key rate for the fifth time since December, though it opted for a more modest 0.25 percentage point higher than the 0.75-point hammer brought in by the Fed.

Meanwhile, Switzerland’s central bank raised rates by half a point for the first time in years. Taiwan’s central bank raised its key rate by an eighth of a point. Japan’s central bank began a two-day meeting on the policy, though it has been held up over raising rates and other economy-slowing moves that investors call “hawkish”.

“The clear read-through here is that the FOMC (Fed) has taken central bank hawkish genie from the bottle, and we should expect more aggressive follow-through from other central banks,” said Stephen Innes of SPI Asset. management said in a comment.

Such moves and the expectation of much more around the world have plunged all manner of investments from bonds to bitcoin this year. Higher interest rates tend to slow down the economy by design in hopes of stamping out inflation. But they are a blunt tool that can squander the economy if used too aggressively.

“Another concern is that with policy changes, there are already weak economic data,” said Bill Northey, senior investment director at US Bank Wealth Management. “This increases the likelihood of a recession in 2023 through the latter half of 2022.”

Earlier this week concerns pulled the S&P 500 into a bear market, meaning it had fallen more than 20 percent from its peak. It is now up more than 23 percent from its record set earlier this year, and it is back at the end of 2020.

Not only is the Federal Reserve raising short-term rates, but this month it has also begun allowing the few trillion-dollar bonds purchased through the pandemic to roll off its balance sheets. This should create upward pressure on long-term interest rates.

The US economy is still largely strong, driven in particular by a strong job market. Fewer workers applied for unemployment benefits last week than a week ago, a report showed on Thursday. But other signs of trouble are emerging.

On Thursday, a report showed homebuilders broke ground on fewer homes in the past month. The rise in mortgage rates directly generated by the Fed’s moves is digging into the industry. A separate reading on manufacturing in the mid-Atlantic region also fell unexpectedly.

Read more: Markets fell around the world, there was a stir in the market on Wall Street

“Corporate earnings estimates have not yet changed to reflect some softer economic data and this could lead to a second phase of this revaluation,” Northey said.

More economists are considering the possibility of a US recession. At Deutsche Bank, economists have raised their forecasts in recent months about when a recession might hit. They see it happening around the middle of 2023.

Treasury yields were swinging Thursday, with the 10-year yield falling to 3.33 percent from 3.39 percent late Wednesday. It had climbed up to 3.48 per cent earlier in the morning, close to its highest level since 2011.

Higher rates are giving the hardest-hit to investments that grew most through the pandemic, benefiting from easier, ultralow rates. This includes bitcoin and high-growth technology stocks.

The decline provided some of the heaviest weighting on the S&P 500 for Apple, Amazon, Tesla and other big tech-oriented stocks. Each declined by at least 3.8 percent.

But the worst hit were stocks whose profits depend on the strength of the economy and whether customers can continue buying amid the highest inflation in decades.

Cruise operator Carnival fell 10.1 per cent and Capital One Financial 7.7 per cent.

All of this is a sharp change from a day earlier, when stocks on Wall Street rallied shortly after the Fed’s biggest rate hike since 1994. Analysts said investors had to heed a comment from Fed Chair Jerome Powell, who said the mega-hike of three-quarters of a percentage point would not be normal.

Powell said Wednesday that the Fed is moving “rapidly” to bring rates closer to normal levels after last week’s surprising report that showed consumer inflation unexpectedly sharp last month dashed expectations. given that inflation may have already peaked.

The Fed is “no longer trying to induce a recession, let’s be clear about that,” Powell said. He called Wednesday’s big increase “front-end loading.”

“Despite their assurances, it is not clear to me that the Fed has the tools they say they use to drive prices down,” said Jason Brady, CEO of Thornberg Investment Management. He also said that even after its big increase on Wednesday, which was three times the normal amount, “the Fed is still behind.”

Even without a recession, higher interest rates make investors less willing to pay higher prices for investments, especially those considered the most expensive or most risky.

After setting a record close to $69,000 late last year, bitcoin is threatening a drop to $20,000. It was down 1.8 percent over the past 24 hours at $20,977 in afternoon trading, according to CoinDesk.

Associated Press Business Writers Damien J. Trois and Yuri Kageyama contributed.

World Nation News Desk
World Nation News Deskhttps://worldnationnews.com/
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