Global markets fall sharply due to concerns about rates, economy

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(AP) – Stocks around the world fell on Friday on further signs of a slowdown in the global economy as central banks apply even more pressure with additional rate hikes.

The S&P 500 fell 2.2% in early afternoon trading in an already tough week. It’s almost back to the yearly low set in mid-June as Wall Street sinks into its bear market. The Dow Jones Industrial Average is down about 20% from its record set earlier in the year. If it closes at or below this level, it will join other major indices that have already crossed the threshold.

European stocks fell as sharply or more after preliminary data suggested they had experienced the worst monthly contraction in business activity since early 2021. The pressure was compounded by a new tax cut plan announced in London, which pushed UK yields higher because it was eventually able to force its central bank to hike rates even faster.

The Federal Reserve and other central banks around the world raised interest rates aggressively this week in hopes of curbing high inflation and have promised more big hikes for the foreseeable future. But such moves are also slowing their economies and threatening a recession as global growth slows. Adding to Friday’s disappointing European trade activity data, a separate report suggested US activity was still contracting, albeit not as sharply as in previous months.

“Financial markets are now fully embracing the Fed’s strong message that there is no turning back in the fight against inflation,” said Douglas Porter, chief economist at BMO Capital Markets.

Crude oil prices fell to their lowest levels since the beginning of this year amid fears a slowing global economy would reduce fuel burn. Cryptocurrency prices also fell sharply as higher interest rates hit investments that seemed unaffordable or highly risky.

Even gold fell globally as high yield bonds make investments that look less attractive without interest. Meanwhile, the US dollar is sharply appreciating against other currencies. This could hurt the profits of American companies with a lot of foreign trade and put financial pressure on much of the developing world.

The Dow Jones Industrial Average fell 602 points, or 2%, to 29,489 and the Nasdaq fell 2.1% as of 12:05 p.m. Eastern. Shares in the smaller company fared even worse. The Russell 2000 fell 3%. US crude prices fell 6.1%, taking a toll on energy stocks.

The Federal Reserve on Wednesday raised interest rates, which affect many consumer and business loans, to a range of 3% to 3.25%. At the beginning of the year it was almost zero. The Fed also issued a forecast that its interest rate could reach 4.4% by the end of the year, a full point higher than it had projected in June.

Government bond yields have risen to multi-year highs as interest rates rise. The 2-year Treasury yield, which follows expectations for Federal Reserve action, rose to 4.20% from 4.12% late Thursday. It is trading at its highest level since 2007. The 10-year government bond yield, which affects mortgage rates, slipped to 3.68% from 3.71%.

Higher interest rates mean that Goldman Sachs strategists say most of their clients now see a “hard landing,” dragging the economy sharply lower, as inevitable. The only question for them is the timing, magnitude and duration of a possible downturn.

High interest rates hurt all types of investments, but stocks can remain stable as long as corporate earnings grow strongly. The problem is that higher interest rates and concerns about a possible recession are causing many analysts to start trimming their forecasts for earnings to come.

In the US, the job market remains remarkably solid and many analysts believe the economy rebounded in the summer quarter after contracting for the first six months of the year. But encouraging signs also suggest that the Fed may need to hike further to achieve the moderation needed to bring inflation down.

Some key sectors of the economy are already weakening. Mortgage rates have hit a 14-year high, causing existing home sales to fall 20% over the past year. But other sectors that do best when interest rates are low are also suffering.

Meanwhile, in Europe, an already struggling economy is grappling with the aftermath of the war on the Eastern Front following Russia’s invasion of Ukraine. The European Central Bank is raising interest rates to fight inflation as the region’s economy is already hit by a recession. And in Asia, China’s economy is still struggling with tough measures to limit COVID infections, which are also hurting businesses.

While Friday’s economic reports were disheartening, some on Wall Street saw them as enough to persuade the Fed and other central banks to tone down their stance on rate hikes. So they only increased fears that interest rates would continue to rise given the already slowing economy.

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Economics writer Christopher Ragber and economics writers Joe McDonald and Matt Ott contributed to this report.

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