HONG KONG: Equity markets tumbled again Tuesday to extend a global rout fuelled by fears of recession, with the Federal Reserve preparing to ramp up interest rates as inflation shows no sign of slowing.
Panic has swept through trading floors since data on Friday showed US consumer prices rising at their fastest pace in a generation owing to a spike in energy and food costs caused by the Ukraine war, China’s lockdowns and supply chain snarls.
All assets are feeling the pain, with Bitcoin threatening to drop below $20,000 for the first time since December 2020, currencies tumbled against the U.S. dollar, and even safe-haven assets including the Japanese yen and gold were squeezed.
Investors are now focusing on Wednesday’s Fed rate decision as it struggles between containing inflation and trying to keep the economy on track.
Danielle DiMartino Booth of Quill Intelligence said: “While tightening policy in a recession is no easy task, the Fed will have to show its willingness to raise rates by more than 0.5 percentage points at its upcoming meeting if inflation continues to surprise the Fed on the upside. “
But JPMorgan Asset Management warned: “While there is no doubt that inflation is a considerable challenge for the U.S. at this point, hitting the brakes too hard could throw the economy off course.”
Ahead of Friday’s news, expectations for a 50-basis-point rate hike were a signal of more to come at the next few meetings. But analysts now say officials have a one-in-three chance of announcing a three-quarters hike, with some even forecasting a one-point increase.
That fueled fears that the world’s largest economy is heading for a recession, with Wall Street plunging on Monday and the broad-based S&P 500 tumbling into a bear market after falling more than 20% from its recent peak.
The sell-off in Asia continued, with Sydney, which reopened after the holiday weekend to catch up to Monday’s drama, falling 5% at one point, while Tokyo fell about 2% and Wellington fell more than 3%.
Hong Kong, Shanghai, Seoul, Singapore, Taipei and Manila were also in deep losses.
Commentators warned that the Fed was in a tough spot on Wednesday’s actions. The decision to raise rates by more than 0.50 percentage point could signal its determination to eventually beat inflation, but it would also damage its credibility by confusing officials’ signals to traders.
“Once the Fed starts going into the ’75s, it’s hard to stop, and that combined with the Fed’s outcome-based approach to inflation feels like it could lead to a recession,” said Evercore ISI’s Krishna Guha and Peter Williams.
Bets on a more aggressive approach sent the dollar soaring against other currencies, hitting a 24-year high against the yen on Monday and the Indian rupee hitting a record high.
Both sectors recovered some of their losses but remained under heavy pressure, while the euro was in danger of hitting two-year lows. Sterling is at its lowest level in two years.
Bitcoin remains on fire, hitting $20,823 for the first time since December 2020, while news that crypto lending platform Celsius Network has suspended withdrawals due to volatile conditions intensified the sell-off. The announcement raised concerns about possible contagion from other companies.