The week central banks spooked markets

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Today, global stock markets were on course for their worst week since the depths of the pandemic after central banks around the world took a hawkish turn in their fight against inflation.

The Bank of England and the Swiss National Bank both raised rates yesterday, after the US Federal Reserve announced a 0.75 percentage point hike on Wednesday, the biggest in decades.

The Fed’s decision and renewed fears of a global slowdown led investors to withdraw billions of dollars from corporate bond funds in what was also a bruising week for fund managers.

The European Central Bank meanwhile said it would speed up work on a new “anti-fragmentation instrument” to help deal with soaring borrowing costs in weaker eurozone economies. The news helped Italian debt rebound after a strong sell-off.

Japan remains an exception. The country’s central bank announced today that it would stick to its ultra-loose monetary policy and leave rates unchanged, keeping bond yields at zero. The yen fell in response.

The Bank of Japan, unlike its European and American counterparts, considers the current surge in inflation to be transitory. The BoE, on the other hand, raised its forecast yesterday, suggesting that the CPI would reach 11% by the end of the year.

It has, however, been accused of being “soft” on its core mandate after taking a less aggressive stance than the Fed. This reflects his view that the UK economy will see virtually no growth over the next three years, says economics editor Chris Giles.

Meanwhile, traders are preparing for more volatility to come.

“The more aggressive line from central banks is adding headwinds to economic growth and equities,” said Mark Haefele, chief investment officer at UBS Global Wealth Management. “The risks of a recession are growing, as a soft landing for the US economy looks increasingly difficult.”

Recent news

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Need to know: the economy

The second and final ballot in French legislative elections will take place on Sunday and will determine whether newly re-elected President Macron has the support he needs to continue his reform agenda. Paris bureau chief Victor Mallet’s great read describes how French politics has put personality before party.

Latest for UK and Europe

UK airlines will have to cancel hundreds of flights this summer after London Gatwick, the UK’s second-busiest airport, said it had to limit operations due to a lack of staff. Budget carrier easyJet is likely to experience the most disruption. Railway strikes next week were called an “incredible act of self-harm” by Transport Minister Grant Shapps, risking the loss of thousands of jobs.

Nearly half a million fewer people were in paid job in the UK in the first quarter of 2022 than before the outbreak of the pandemic, according to a new study. The decline is mainly due to older workers retiring early, and mainly due to a lifestyle choice, rather than as a result of layoff or poor health.

the North Sea Oil and gas producers have stepped up their protests against the UK’s new windfall tax, calling it ‘anti-investment’ and ‘anti-business’. The United States has urged European governments to mitigate the impact of its ban on insurance Russian oil cargoes to avoid driving up world crude prices.

The dairy sector, worth £1.5bn a year to Northern Ireland, is set to be a big loser if the UK government goes ahead with plans to tear up Brexit trade rules. Proposals for a dual regulatory regime, where goods entering the region could be produced to UK or EU standards, could mean farmers would suddenly be saddled with unsaleable produce if guidelines diverge. Legal commentator David Allen Green explains in this video why Northern Ireland’s Protocol Bill breaks international law.

Video: Is the Northern Ireland Protocol Bill a breach of international law?

The European Commission has recommended Ukraine for candidate status for EU membership. The decision must be approved by each of the 27 EU member states at a summit next Thursday and Friday.

Latest World

The world trade organization agreed to a partial waiver for patents on Covid-19 vaccines and announced deals in other contentious areas such as fisheries subsidies and food export restrictions. The vaccine deal, however, fell short of demands from India and South Africa to exempt all Covid-related drugs, disappointing campaigners.

Two tense weeks UN climate talks finished with rich countries being accused of betraying poor nations when it comes to funding to fight climate change. The result puts additional pressure on Egypt to find a consensus when it hosts COP27 in five months.

China Winter Olympic Villages have been turned into Covid quarantine camps. The latest outbreak in Beijing has shuttered entertainment venues and forced millions to line up daily for Covid tests and thousands to self-isolate.

The German government called on the public to save energy after Russia cut flows in the critical Nord Stream pipeline. Italy, Austria and Slovakia also reported further reductions in supply. Separately, Australia urged people to save energy by invoking emergency powers to block coal exports if necessary.

The soaring cost of staple foods have a significant effect on Latin American eating habits and lead to an increase in the number of people suffering from hunger. While Latin American economies are generally food self-sufficient, net exporters face commodity inflationary pressures when prices for goods such as grain are set internationally.

Academic Arvind Subramanian describes the five major changes that are transforming the global economy, from the end of cheap finance and commercial hyper-globalization to the stalling of economic convergence, the weakening of cooperation between countries and the idea that global integration was good for peace.

How must personal investors react to these changes and to the turmoil in the financial markets? FT Money breaks down the bulls and bears arguments while columnist Merryn Somerset Webb offers a guide through the chaos (she’s not a bitcoin fan by the way).

Need to know: company

China Big tech groups have suffered under Beijing’s tough pandemic restrictions, losing trillions of dollars in market value and laying off workers massively. The phrase bailanwhich roughly translates to “let rot,” has become popular among young people across the country to describe how they gave up trying to find a job.

Online clothing retailer asos issued another profit warning, blaming rising inflation for the growing number of product returns, an issue also flagged by its rival Boohhh. Tesco overemphasized the changing behavior of consumers as inflation begins to bite.

Ferrari said 40% of its car sales would be fully electric by 2030 after its first such model launched in 2025. Hybrids would take up another 40% and traditional combustion engines would drop to just 20%.

Bitcoin miners were dragged into the cryptocurrency price “bloodbath” collapse. The crypto market fell from a high of $3.2 billion in November to under $1 billion and left buyers of bitcoin, the world’s most popular digital asset, in the red.

Column chart of spot volumes on major exchanges (in billions of dollars) showing that Crypto trading volumes have fallen sharply from the peak

Scientific report

Omicron sub-variants are fueling a rise in Covid hospitalizations across Europe, including in Portugal, Germany, France and the UK. Scientists still don’t know if it’s because they’re more transmissible or because immunity is waning.

Chart showing that the BA.4/5 Omicron sub-variants triggered waves of Covid hospitalizations in Portugal and South Africa, and are now sending rising numbers elsewhere

The FT has revealed that the World Health Organization is set to back the use of Variant-specific Covid bites as a third hit, a significant shift in thinking and first movement to support their use since Omicron’s emergence late last year.

Advisors to US regulators argued Covid vaccines for children under five, the last age group without access to shots. Moderna and BioNTech/Pfizer’s children’s plans could roll out starting next week if final approval is granted.

Sanofi and GSKwhich have so far lagged rivals in producing Covid vaccines, reported positive test results from their ‘next generation’ booster which produced a strong immune response against the Omicron variant.

BioNTech is investing profits from its Covid vaccine into oncology using its mRNA technology. Our great read contains the details.

Covid cases and vaccinations

Total number of global cases: 532.2mn

Total doses administered: 12.0 billion

Get the latest global picture with our vaccine tracker

And finally…

Why do we fall in love scams? Dan McCrum, the FT journalist who led the investigation into payment company Wirecard, analyzes the black magic employed by fraudsters in the FT Weekend Essay.

© Tom Straw

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