Shares tumble, dollar advances as inflation-busting interest rate hikes trigger recession

On Monday, the dollar rose and US and European markets plummeted as concerns grew that efforts by central banks to rein in increasing consumer prices through inflation-busting interest rate hikes would undermine the world economy and trigger a recession. 

The benchmark European STOXX index closed down 1%, and each of the three major Wall Street indices fell roughly 2% as a result of Russia’s Gazprom announcing that it would stop supplying natural gas to Europe for three days at the end of the month.

As traders feared demand would be harmed by a slowdown, oil initially dropped 4%. Following hawkish indications from European Central Bank policymakers, the most recent disruption to the continent’s energy supply heightened worries about the future of the continent’s economy. Russian natural gas exports to Europe have decreased by over 75% since last year. 

As the market prepared for a speech on Friday from Federal Reserve Chair Jerome Powell, who will address the Fed’s goal to keep inflation low in Jackson Hole, Wyoming, the inversion of the yield curve on U.S. Treasuries widened—a recession indication.

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The Canadian dollar was pushed over 1.30 versus the dollar as a result of the strengthening of the dollar, which also caused the euro to go below parity at 0.9932. Gold prices dropped to their lowest point in over four weeks as a result of the dollar’s surge. 

Instead of the larger likelihood of a modest 50 basis point boost, which was the market’s estimate heading into the weekend, Fed funds futures are now pricing in a 54.5% chance of a 75 basis point hike by the Fed in September. 

China stands out as an exception to the tightening trend, as the central bank cut certain key lending rates on Monday by 5 to 15 basis points in an effort to stabilise a faltering economy and a pressured property market.

(with inputs from agencies)