Market storm gains momentum as virtually no asset class is spared

TSX, S&P 500 Get Hammered As Selling Gets Ugly

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Global markets came under more pressure on Friday as moods on the economic outlook around the world turned sour. Stocks, currencies, other asset classes – virtually nothing has been spared in the economic cyclone that has hit in recent weeks. Here’s what economists and analysts are looking forward to during this trading day:

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Markets in turmoil

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Indices have fallen across the board in Friday trading. The composite S&P TSX index fell more than 2.8 percent to 18,463 at 1:45 PM ET, as energy stocks fell to their lowest point in more than two months and oil prices plunged 6 percent.

The US markets fared no better. The S&P 500 fell about 2.3 percent to 3,672 at 1:45 PM ET and the Dow Jones fell more than two percent to 29,447. Goldman Sachs Group Inc. lowered its target for the S&P 500 index from 4,300 to 3,600 by the end of the year, signaling a shift in interest rate expectations and how they would weigh on stocks.

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Friday’s turmoil started in the European and Asian markets.

“There is no risk taking this Friday morning as equities across Europe are down a staggering three percent, led by the FTSE MIB,” MET economists Jennifer Lee and Shelly Kaushik said in their morning note. “Asia was not spared as the region broadly sold, with the Hang Seng down more than one percent, while the CSI 300 kept its losses to 0.3 percent.”

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Strategists of Bank of America Corp. point to a ‘cash is king’ attitude among investors who are displaying the most pessimistic attitude to the markets since the global financial crisis of 2008. According to the bank, cash inflows were $30.3 billion, while global equity fund outflows hit $7.8 billion, bonds lost $6.9 billion and gold investments fell $400 million in the week of Sept. 21.

Canadian Retail Crisis

Canada’s most recent retail data on Friday was also disappointing, with sales falling 2.5 percent in July as lower gasoline prices contributed to the decline. While Canadians saved money on fuel, the windfall didn’t go to other retailers, Desjardins director and chief of macro strategy Royce Mendes said in a note following the data. Mendes also said the modest 0.4 percent rebound in nominal retail sales that Statistics Canada estimates for August may indicate higher volumes.

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“That said, the trend is clear, consumers are pulling back on spending,” Mendes said. “The slowdown in consumption is exactly in line with what the Bank of Canada is trying to achieve with its rate hikes.”

The Bank of Canada has sought to rebalance high demand with limited supply by pursuing an aggressive rate hike cycle this year, raising key rates by three percentage points so far.

Pound drops

On the other side of the pond, the British pound fell two percent, crashing below $1.11 for the first time since 1985, adding to the pressure the currency faced earlier in the week. The plunge came as newly appointed British Prime Minister Liz Truss implemented the country’s biggest tax cuts since the early 1970s.

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Karl Schamotta, chief market strategist at Cambridge Global Payments in Toronto, said recent weak retail data exacerbated fears of a deep and prolonged recession, adding to the pound’s grief.

The Bank of England raised its key interest rate this week by 50 basis points to 2.25 percent, which Schamotta said would help widen interest rate differentials against the pound before the decision.

Don’t fight the Fed. just don’t

US Federal Reserve chairman Jerome Powell made his comments about Jackson Hole true in late August that the central bank was willing to trade in economic growth if it meant stamping out decades-long inflation. The Fed’s 75 basis point increase earlier this week showed that Powell was not bluffing, a detail economist David Rosenberg of Rosenberg Research & Associates Inc. was quick to pick up.

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“What part of ‘don’t fight the Fed’ do the markets not understand?” Rosenberg wondered in his Friday morning note to customers. “Powell’s message is clear: The Fed is serious this time, and it’s not a fluff or a craziness.”

“Whether the Fed is ultimately right or wrong in what they are doing, they control the ‘magic lever,’ so investors need to be prepared for further weakness, both economically and in terms of markets,” Rosenberg added.

Recession risks are increasing

More economists say recession risks are increasing. Douglas Porter, chief economist at the Bank of Montreal, said the risk of a North American recession in the coming year has now risen above 50 percent.

“We are adjusting our forecast accordingly to reflect a moderate downturn in the first half of 2023 in both the US and Canadian economies,” Porter said in a Sept. 23 note.

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Porter added that ongoing inflation and the mounting risks of monetary policy overshoot with rapidly rising interest rates amplify these risks.

“Financial markets are now fully absorbing the Fed’s harsh message that there will be no pullback from the inflation battle; the surge in global prices this week has further blunted equities, commodity prices and commodity currencies, given the increasing likelihood of a recession,” Porter said.

Similarly, a recent note from Desjardins said that with the Federal Reserve “focused on controlling inflation,” the likelihood of a recession due to aggressive policy moves has increased.

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