The view of ever-increasing rate hikes in the US, along with worse macroeconomic data in the form of PMI indices, may have negatively impacted stock indices on Friday, 9/23/22. Added to this was the UK’s tax cut plan, which could send investors into a tailspin in the current situation.
As of 12:52 GMT+3, the German DAX loses more than 2%. Britain’s FTSE100 is down nearly 2% to 7036 points. (the lowest in 10 weeks) the broad Stoxx Europe 600 index of European companies is down 20 percent from its peak in November 2021 to 391 points, signaling a potential downturn. The EU50 index hit its lowest level in 22 months at 3356 points, while the German DAX fell to 12354 points, its lowest level in 22 months.
More walks announcements, UK plan and weak data
There seems to be no good news in the markets today, only bad or even worse news, which could be reflected in the behavior of stock indices. Equity market investors face the prospect of increasingly expensive capital on both sides of the Atlantic, as ECB President Christine Lagarde has said euro-zone policymakers will continue to raise interest rates over the next few meetings, and markets are betting on it. that the ECB’s deposit rate is 3% by June 2023.
In addition, increasingly weaker macroeconomic data may emerge, such as the current series of PMI index readings. They show that rising energy prices continued to hamper economic activity in the eurozone, and September PMI data showed the eurozone and the German private sector contracted for the third month in a row. The S&P Global Flash Eurozone Composite PMI fell to 48.2 points in September 2022 from 48.9 points in August. Excluding pandemic shocks, the reading was the lowest since May 2013. New orders fell the most since April 2013, excluding periods of pandemic restraint, and the backlog of unfulfilled orders fell for the third month in a row.
The UK with a tax plan
Financial markets may have taken another blow with the announcement of the implementation of the UK’s £161bn tax plan over 5 years, Bloomberg reported, which could be a breakneck task with an unknown outcome under current circumstances. On the one hand, the Bank of England has announced the possibility to sell £80bn worth of bonds within 12 months and follow further rate hikes, and the government can also raise money from bond sales for its plans. This could lead to a bump in the UK financial market, where bonds, equities and the British pound even seemed to fall simultaneously.
Investors in the interest rate market now seem to be considering the possibility of a 1 percentage point rise in the Bank of England’s key interest rate by November, in just over a month. To sum up the events in the UK in recent hours, according to Bloomberg, Truss’ economic plan is causing UK markets to collapse, the UK is planning its biggest tax cuts since 1972 to boost economic growth, and UK bonds are falling as government will rise by borrowing more than expected, the UK is likely already in recession as the pound’s weakness drives inflation up.
What follows after such a sharp plunge in the markets?
It seems that the financial markets need to be stabilized in anticipation of the action of the central banks. Currently, there seems to be a hunt for higher and higher potential interest rates in the future. Investors don’t know where this race and the walking festival will actually end. None of us probably want a situation where a loan has a certain interest rate one month, another the next, and the interest rate could still be different in six months. In such a situation, companies cannot function properly, and neither can the financial markets.