Asian markets slumped on Friday after another devastating day in the US and European trading floors, with inflation continuing to soar and central bankers becoming increasingly aggressive in their attempts to contain prices.
However, sterling managed to hold on to gains after recouping even more of the huge losses suffered earlier in the week on a mini-budget that cuts taxes that analysts warned would hurt an already struggling UK economy could inflict.
The pound’s rebound – from a record low of $1.0350 on Monday to above $1.11 on Friday – came after the Bank of England pledged $71 billion in support to shaken financial markets amid fears several pension funds could go under .
Britain’s troubled currency received an additional boost on Thursday’s news that the budget watchdog will present the cost of new finance minister Kwasi Kwarteng’s financial plan on October 7, two weeks earlier than originally announced.
“This has helped allay some fears in the markets at the initial prospect of a free big tax package,” said National Australia Bank’s Tapas Strickland.
Markets remain concerned about the UK economy and the impact tens of billions of dollars in borrowing will have on interest rates, with observers warning that the Bank of England could announce a 1.5 percentage point hike at its next meeting in November.
Westpac Banking Corp’s Sean Callow said the pound’s gains this week were “a reminder that currencies are being driven by a multitude of factors – it’s clearly not due to an improving UK outlook”.
The bank’s cash injection meant it had to put on hold its monetary tightening plan as part of a global effort to combat decades of high inflation.
– Russia is worried –
And in a sign of the long road ahead for CFOs — and the bleak outlook for stocks — data from several countries, including Germany and Belgium, showed this week that prices are still up about 10 percent year-on-year.
In the United States, Federal Reserve officials reiterated their intention to hike interest rates until they tame inflation, even if that means plunging the world’s leading economy into recession.
And the case for a fourth straight 0.75 percentage point rise was strengthened by news that initial jobless claims fell below 200k for the first time since May.
All three major indices on Wall Street ended deep in the red, with the S&P 500 closing at its lowest level since November 2020.
And Asia took over the baton.
Hong Kong and Shanghai fell as data showed China’s manufacturing and services sectors struggled again in September with Covid lockdowns in parts of the country that have battered the world’s second-largest economy.
There was also little reaction to news that Beijing would allow some cities to lower mortgage rates for first-home buyers as it seeks to prop up the housing market.
Tokyo, Sydney, Seoul, Singapore, Taipei, Wellington, Manila and Jakarta were also out.
“Risk assets stand no chance of a meaningful recovery if the economy continues to show resilience while inflation remains well above the Fed’s benchmark rate,” said Edward Moya of OANDA.
Market sentiment was also undermined by growing fears over developments in the Ukraine war as Russia prepares to annex four of its neighbor’s occupied regions on Friday, with President Vladimir Putin threatening to use nuclear weapons to defend the areas.
– Key figures at 0300 GMT –
Tokyo – Nikkei 225: down 1.7 percent at 25,979.75 (breakout)
Hong Kong – Hang Seng Index: down 0.2 percent at 17,132.81
Shanghai — Composite: down 0.4 percent at 3,029.26
Pound/dollar: DOWN at $1.1113 from $1.1116 on Thursday
Euro/Dollar: DOWN at $0.9807 from $0.9818
Euro/Pound: DOWN at 88.27p from 88.28p
Dollar/yen: rise to 144.70 yen from 144.42 yen
West Texas Intermediate: FALSE, up 0.1 percent at $81.14 a barrel
North Sea Brent Crude: FALSE, up 0.3 percent at $88.23 a barrel
New York – Dow: down 1.5 percent at 29,225.61 (close)
London – FTSE 100: down 1.8 percent at 6,881.59 (close)