Global equities tumbled today due to persistent inflation and possible interest rate hikes that spooked the investors. The Dow Jones Industrial Average dropped more than 800 points and the FTSE 100, DAX and CAC 40 all dropped over 2%. Asian markets were also affected with the Japan’s Nikkei 225 and the Hong Kong’s Hang Seng Index declining by approximately 3%.
The cause of this global market meltdown seems to be the release of inflation rate figures for a number of the world’s largest economies that turned out to be even higher than anticipated. The Consumer Price Index (CPI) in the United States went up by 0. It rose to 4% in August and thus the annual growth rate stood at 5%. 3%, which is way above the target of the Federal Reserve at 2%.
Comparable inflationary pressures were observed in the Eurozone and the United Kingdom and market expectations for central banks to raise interest rates earlier than expected were revived.
Investors are especially interested in the effects of increasing interest rates on the economic growth and business earnings. Hike in the borrowing costs may reduce consumer consumption and business investment, which may disrupt the slow recovery after the pandemic.
Among the sectors, the technology sector which has been one of the major contributors to the market growth in the recent past was the most affected in today’s sell-off. Apple, Amazon and Microsoft for instance all recorded a decline in their stock prices of more than 3%.
Inflation concerns pushed bond yields higher with the 10-year U. S. Treasury note yield reaching its highest level in more than a year. This action put more pressure on the equity valuations because when the yields rise bond become more attractive as compared to equity.
Currencies markets were also affected by the event with the US dollar appreciating against most of the major world currencies. The dollar strengthened further, which created more problems for the emerging markets, most of which have a high dollar exposure.
While investors looked for shelter, gold prices increased slightly, while cryptocurrencies such as Bitcoin remained highly volatile. The oil prices dropped on the back of rising concerns that higher interest rates could dampen the economic growth and thus, the demand for oil.
As always, market analysts are still torn between the idea that this is just a normal market correction and that this is the start of a new bear market. Some analysts believe that the market was ripe for a correction given its performance in the last one year while others are concerned that inflation will push central banks to act more than what is currently priced in.
The next several days will be important as the market participants are to process the recent economic information and look for directions from the key central banks. The next policy meeting of the Federal Reserve is due next week and market participants will be keen to see any changes in the monetary policy. For now, markets will continue to be volatile as investors try to come to terms with the less than certain economic environment.