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The market turmoil from before the weekend continues with full force into the new week. The sharp fall on Wall Street on Friday, where the broad collective index S&P 500 fell close to three percent, quickly spread to the European stock exchanges on Monday.
The European stock exchange index Euronext 100 falls 2.4 percent, while the main index on the Oslo Stock Exchange falls 2.8 percent. At the same time, the oil price is down close to three percent to 119.5 dollars a barrel.
The fall internationally has sent the fear index into the air. Since Friday morning, the US vix index, which measures what investors expect in future fluctuations, has risen over 14 percent.
According to Storebrand’s head of allocation and global interest rates, Olav Chen, the markets fear that the US Federal Reserve (Fed) will go to great lengths to defend the inflation target of two percent, after a period of sky-high inflation.
– The markets fear recession. The central banks are willing to go to great lengths to defend the inflation target, even if it means slowing down growth, he says.
Sky-high inflation and war
The backdrop for the significant fall in the stock markets is the inflation figures from the USA, there fresh numbers published on Friday showed that inflation in the world’s largest economy took a new pace last month.
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Inflation in May ended at 8.6 per cent on an annual basis – the highest level since 1981.
The numbers sent shockwaves through the financial markets, where all the leading indices on Wall Street fell sharply. The worst was for the technology-heavy Nasdaq index, which ended down close to 3.5 percent.
After a decade of record low interest rates and huge support purchases, the stock markets now fear that the Fed will have to tighten so sharply that it will destroy growth in the economy – a so-called recession fear.
– The market fears that the Fed has lost control of an inflation that has run wild. The Fed must choose between plague or cholera. To bring down inflation, it will have to raise interest rates sharply and reduce economic activity, says Chen.
Financial Times writes on Monday that over 70 percent of respondents in a survey conducted by the newspaper among leading economists, believe that a recession will occur in the United States within the next year.
Most of the total of 49 respondents point to the Fed’s announced monetary tightening, as the main reason why the economy will enter a recession.
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On Wednesday, the answer everyone has been waiting for comes when the Fed presents its interest rate decision. It is expected that it will increase the interest rate by 0.5 percentage points to 1.25 per cent.
– Four double interest rate hikes in a row have been priced in for the rest of the year. This means an increase in the interest rate of two percentage points over the course of six months. This is clearly shock therapy, he says.(Terms)Copyright Dagens Næringsliv AS and / or our suppliers. We would like you to share our cases using a link, which leads directly to our pages. Copying or other use of all or part of the content may only take place with written permission or as permitted by law. For additional terms look here.
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