Global stock markets plunged into pessimism on Thursday (16), a day after the Fed (Federal Reserve, the American central bank) confirmed a 0.75 percentage point increase in its interest rate.
It is the biggest increase applied by the monetary authority of the United States since 1994, indicating a more aggressive posture in the face of the biggest inflation in the country in four decades.
The movement of world stock exchanges on Thursday contradicted the positive reaction of the market immediately after the Fed rate was released the day before, which led analysts to believe that investors had already absorbed the impact of the interest rate hike.
The increase had been expected since last Friday, when US consumer price data for May showed a faster-than-expected acceleration in inflation.
On Thursday, however, market participants began to weigh the impacts that an extremely aggressive hike in US interest rates will have on the world economy.
By 12:30 pm, leading New York stock market indicators were negative. The S&P 500, the stock market’s benchmark, sank 3.34%. The Dow Jones, which tracks the shares of three dozen large companies in the country, tumbled 2.51%.
The Nasdaq indicator tumbled 3.79%. This index is a good thermometer to gauge the fear of rising interest rates, as it is composed of medium-sized companies in the technology sector that depend on cheap and plentiful credit to grow.
In Europe, the London, Paris and Frankfurt Stock Exchanges plummeted 3.05%, 2.48% and 3.43%, respectively. In Asia, the Hong Kong market closed down by 2.17%. The index that tracks Chinese companies in Shanghai and Shenzhen fell 0.66%.
In Brazil, the stock and foreign exchange markets do not work due to the Corpus Christi celebrations. The day before, the Ibovespa closed up 0.73%, at 102,806 points, interrupting a sequence of eight consecutive daily declines.
The increase applied on Thursday by the Fed raised the benchmark rate for daily lending between banks (a benchmark for the credit sector in general) to a range between 1.5% and 1.75% per year. The cycle of increases, however, is far from over.
Projections released by The Wall Street Journal and Financial Times point to a rate close to 3.4% by the end of this year, or an additional approximately 1.75 percentage points in the next four meetings of the authorities that make up the Fomc, the monetary council. of the Federal
After the decision was released, Fed Chairman Jerome Powell said he hoped that increases of this magnitude would not become common, but also commented that he considered a further increase of between 0.50 and 0.75 point likely at the next meeting of the body.
Powell stressed that the next steps will be dictated by inflationary pressures, highlighting in his commentary the problems in the global supply chain arising from Covid in China and the War in Ukraine.
Market analysts again commented on Thursday that the more aggressive monetary tightening poses a threat of a severe cooling of economic activity.
“I think there’s a perception that we really could be heading for a recession,” Altaf Kassam, head of investment strategy for Europe, Middle East and Africa at State Street Global Advisors, said in an interview with The Wall Street Journal.
US credit crunch has global impact
Monetary tightening — which means making credit more expensive to cool consumption and slow down inflation — in the United States increases the yield on US Treasury bonds, considered the safest investment on the planet.
This leads investors to reduce their investments in riskier markets, such as the Stock Exchanges. It is a time when the market wants to take advantage of the most attractive fixed income in the US.
This increase in the flow of dollars towards sovereign bonds in the United States makes the currency more scarce and expensive, causing a chain reaction in the business world.
In emerging economy countries, such as Brazil, the rise in the dollar raises import costs and triggers inflation.
Central banks are forced to raise interest rates to convince investors that the return offered by their sovereign bonds is worth the risk they take by not bringing their dollars to the US.
The main problem with this movement is the lack of liquidity in the market, since investors now have the chance to obtain comfortable gains with high interest paid by fixed income all over the world. The money that comes out of the stock exchanges is needed by companies, as they lose capital with the fall of their shares and stop growing and generating jobs.
But the current crisis is even more difficult to face because the credit crunch is not the only remedy capable of curbing inflation. Still as a result of the stoppages of activities caused by the Covid pandemic, the world faces a lack of goods and inputs.
The rise in prices, therefore, would also need to be tackled by increasing supply. But there are at least two major impediments to normalizing the global trade of goods.
Firstly, China, which concentrates much of the world’s industrialized goods production, maintains severe restrictions on the operation of companies to try to contain infections by the coronavirus.
In addition, the war in Ukraine reduced the supply of oil and made the price of raw material soar, as Russian production was banned from the United States and part of Europe. Also due to the conflict, Ukraine’s grain production faces obstacles to be shipped, collaborating with the global increase in food prices.