The week central banks spooked the markets

Good evening

Global stock markets today were on track for their worst week since the depths of the pandemic after central banks across the world took a hawkish shift in their battle against inflation.

The Bank of England and the Swiss National Bank both increased rates yesterday, following Wednesday’s announcement by the US Federal Reserve of a 0.75 percentage points rise, its biggest in decades.

The Fed decision and renewed fears of a global downturn have led investors to pull billions of dollars out of corporate bond funds in what has also been a bruising week for fund managers.

The European Central Bank meanwhile said it would speed up work on a new “anti-fragmentation instrument” to help address surging borrowing costs in the eurozone’s weaker economies. The news helped Italy’s debt rebound after a heavy-sell off.

Japan remains an outlier. The country’s central bank today announced it would stick to its ultra-loose monetary policy and leave rates on hold, keeping bond yields at zero. The yen sank in response.

The Bank of Japan, unlike its counterparts in Europe and the US, believes the current surge in inflation is transitory. The BoE by contrast yesterday increased its forecast, suggesting CPI would top 11 per cent by the end of the year.

It has however been accused of “going soft” on its core mandate after adopting a less aggressive stance than the Fed. This reflects its view that the UK economy will barely grow at all in the next three years, says economics editor Chris Giles.

Traders meanwhile are braced for more volatility ahead.

“The more aggressive line by central banks adds to headwinds for both economic growth and equities,” said Mark Haefele, chief investment officer at UBS Global Wealth Management. “The risks of a recession are rising, while achieving a soft landing for the US economy appears increasingly challenging.”

Latest news

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Need to know: the economy

The second and final voting round in France’s parliamentary elections takes place on Sunday and will determine whether freshly re-elected President Macron has the backing to continue with his reform agenda. Paris bureau chief Victor Mallet’s Big Read outlines how French politics has put personality ahead of party.

Latest for the UK and Europe

UK airlines will have to cancel hundreds of flights this summer after London Gatwick, the UK’s second-busiest airport, said it needed to limit operations because of staff shortages. Budget carrier easyJet is likely to suffer the most disruption. Rail strikes next week were labelled as an ‘incredible act of self-harm’ by transport minister Grant Shapps, risking thousands of job losses.

Almost half a million fewer people were in paid work in the UK in the first quarter of 2022 than before the pandemic struck, according to a new study. The drop has been mainly due to older workers retiring early, and mostly as a lifestyle choice, rather than through redundancy or ill health.

North Sea oil and gas producers upped their protests against the UK’s new windfall tax on their profits, calling it “anti-investment” and “anti-business”. The US has urged European governments to ease the impact of their ban on insuring Russian oil cargoes to avoid driving up global crude prices.

The dairy sector, worth £1.5bn a year to Northern Ireland, is set to be a big loser if the UK government goes ahead with plans to rip up Brexit trading rules. Proposals for a dual regulatory regime, where goods entering the region could be produced either to UK or to EU standards, could mean farmers suddenly saddled with unsellable products if guidelines diverged. Legal commentator David Allen Green in this video explains why the Northern Ireland Protocol Bill breaches international law.

The European Commission recommended Ukraine for candidate status to join the EU. The decision must be endorsed by each of the 27 EU member states at a summit next Thursday and Friday.

Global latest

The World Trade Organization agreed a partial waiver for Covid-19 vaccine patents as well as announcing deals in other contentious areas such as fishing subsidies and food export constrictions. The vaccine deal however fell short of demands from India and South Africa to exempt all Covid-related medicines, disappointing campaigners.

Two weeks of tense UN climate talks ended with rich countries accused of betraying poor nations over finance to combat climate change. The outcome puts extra pressure on Egypt to find a consensus when it hosts COP27 in five months’ time.

China’s Winter Olympics villages have been turned into Covid quarantine camps. The latest outbreak in Beijing has closed entertainment venues and forced millions to queue daily for Covid testing and thousands to go into isolation.

The German government appealed to the public to conserve energy after Russia cut flows through the critical Nord Stream pipeline. Italy, Austria and Slovakia also reported more reductions in supply. Separately, Australia urged people to save energy as it invoked emergency powers to block coal exports if necessary.

Soaring costs of food staples are having a big effect on Latin American culinary habits and driving a rise in the number of people experiencing hunger. While LatAm economies are generally self-sufficient in food, net exporters face inflationary pressures for produce when prices for goods such as grain are set internationally.

Academic Arvind Subramanian outlines the five major changes that are transforming the world economy, from the end of cheap finance and trade hyperglobalisation to the stalling of economic convergence, weakening co-operation among countries and the idea that global integration was good for peace.

How should personal investors react to these changes and the turmoil in financial markets? FT Money unpicks the arguments of the bulls and the bears while columnist Merryn Somerset Webb offers a guide through the chaos (she’s not a fan of bitcoin btw).

Need to know: business

China’s Big Tech groups have suffered under Beijing’s strict pandemic restrictions, losing trillions of dollars in market value and mass dismissals of workers. The phrase bailan, roughly meaning “let it rot”, has become popular among the country’s youth to describe how they have given up trying to find a job.

Online clothing retailer Asos issued another profit warning, blaming rising inflation for the growing number of product returns, a problem also reported by rival Boohoo. Tesco too highlighted changing consumer behaviour as inflation begins to bite.

Ferrari said 40 per cent of its car sales would be fully electric by 2030 after launching its first such model in 2025. Hybrids would take up another 40 per cent and traditional combustion engines would fall to just 20 per cent.

Bitcoin miners have been dragged into the “bloodbath” collapse in cryptocurrency prices. The crypto market has shrunk from a high of $3.2tn in November to under $1tn and has left buyers of bitcoin, the world’s most popular digital asset, in the red.

Science round up

Omicron sub-variants are fuelling a rise in Covid hospitalisations across Europe, most notably in Portugal, Germany, France and the UK. Scientists are still unsure whether it is because they are more transmissible or because immunity is waning.

The FT revealed that the World Health Organization was set to back the use of variant-specific Covid jabs as a third shot, a significant shift in thinking and the first move to back their use since Omicron emerged late last year.

Advisors to US regulators have backed Covid vaccines for children under five, the last age group without access to jabs. The child-sized shots from Moderna and BioNTech/Pfizer could be rolled out from next week if final approval is granted.

Sanofi and GSK, which so far have lagged their rivals in producing Covid vaccines, reported positive test results from their “next-generation” booster which produced a strong immune response against the Omicron variant.

BioNTech is ploughing profits from its Covid vaccine into oncology using its mRNA technology. Our Big Read has the details.

Get the latest worldwide picture with our vaccine tracker

And finally…

Why do we fall for scams? Dan McCrum, the FT reporter who led the investigation into payments company Wirecard, analyses the dark magic employed by fraudsters in the FT Weekend Essay.