Markets now understand the realities of the situation: new rate hikes are coming and China’s patience is reaching its limits.
After an unexpected June rally, the first week of July saw a steep market downturn. Finally, stock exchanges are realizing that interest rates will stay high for the foreseeable future, making a global recession inevitable.
But first, let’s give a look at some numbers:
- The S&P 500 and the Dow Jones both closed the week in red, respectively at -0.16% and -1.16%. The Nasdaq Composite closed in balance at +0.01%;
- On the other hand, European stock exchanges experienced a steep fall. Frankfurt closed at -3.69%, London at -3.65% and Milan at -2.59%;
- Asian markets did not perform better as the Tokyo Nikkei ended the week at -3.37% and Shanghai at -0.39%.
Central banks minutes
Markets’ bearish downturn was mainly caused by the American Federal Reserve and European Central Bank minutes.
It is now clear that both central banks want to keep raising interest rates, with the first rate cuts coming as late as May/June 2024.
US inflation is far lower than Europe’s, sitting at 4% and 5.5% respectively. Nevertheless, the Fed knows core inflation remains high and risks stagnating the overall economy, especially considering the housing market’s increasingly inflated prices.
Therefore, the June rate hike pause was a mere exception, with at least two more increases coming in 2023.
The ECB, on the other hand, never considered a pause in rate hikes, and intends on fighting inflation until it finally reaches the 2% target. No rate stabilization is predicted for 2023, despite the Eurozone and Germany already falling into a recession.
China restricts metal exports
Another reality finally setting into markets is China’s willingness to cut foreign exports, facing an increasingly hostile United States.
This week, Beijing enacted a restriction on gallium and germanium exports, two key metal components in advanced electronic products of which China controls most of the world’s production.
The restriction is the first serious Chinese reply to American protectionist measures. The Biden administration has curbed microchip exports to China, both in terms of manufacturing and design.
NVIDIA, the world’s leading chipmaker, experienced a decline in stock price following the announcement.
Microchips are used in every digital and electronic product, as well as being a crucial component in modern military equipment.
The United States wants to limit chip technology in China to avoid an improvement in its military, whose gap with the American army gets narrower every year.
China is the US’ main geopolitical rival, and Washington needs to block every possibility of strengthening them. Even if that involves hurting American companies.
