Growth fears grip world stock markets before Fed meeting

LONDON (Reuters): World stock markets tumbled on Tuesday as fears about a slowing global economy gripped investors, just as the US Federal Reserve looks set this week to deliver its fourth interest-rate hike of the year.

Germany’s Ifo economic institute said its business climate index fell for the fourth month in a row to its lowest level in more than two years, adding to the global growth worries.

Blue-chip bourses in London, Paris and Frankfurt fell as much as 0.8% in early trade with oil stocks leading the decline as crude prices slid more than three%.

A speech by Chinese President Xi Jinping which investors had hoped could lift morale had little impact, with Chinese shares falling over 1%.

Japan’s Nikkei lost 1.8%, with Monday’s fall in US stocks to their lowest levels in more than a year hurting sentiment broadly. 

Turbulent stock markets and slowing international growth have fueled speculation that the Federal Reserve, which opens a two-day meeting on Tuesday, could now pause its tightening cycle or risk harming the US economy.

MSCI’s world stock index, down a quarter of a% on Tuesday, has slid 9% this year and is set for its worst year in a decade.

“This year has been quite remarkable in the sense that pretty much all asset classes have been down, which is even worse than 2008 because during the GFC (global financial crisis) we at least saw some safe havens – US government bonds, gold – performing positively,” said Stefan Keller, asset allocation strategist at Candriam in Luxembourg.

“At least in real terms, that’s not the case today. This is indeed a huge challenge. Clearly it’s in sharp contrast to last year’s optimistic outlook.”

While the Fed is expected to lift rates this week, many investors expect signs of economic turbulence to prompt the Fed to signal a slowdown in the pace of tightening next year.

On Monday, US President Donald Trump and his top trade adviser ratcheted up their criticism of the central bank’s monetary tightening, raising investor anxiety.

Dollar weakens

The dollar meanwhile weakened ahead of the Fed’s meeting.

The euro was up 0.2% at $1.1373, having recovered all of its losses from Monday when it was hit by weak euro zone data.

The dollar was also weaker against Japan’s currency, trading down 0.4% at 112.35 yen.

“Markets are starting to price out the expectation of rate hikes to come,” said Rainer Guntermann, rates strategist at Commerzbank. “Our base case is a rate hike this week, then we expect the Fed to pause after that.”

Safe-haven US and German bond markets appeared to be the beneficiaries of the risk-off mood in world markets for now.

Germany’s 10-year bond yield fell to a one-week low of 0.23%, while five-year US Treasury yields fell to their lowest since May at 2.66%.

Earlier on Tuesday, Xi called for the implementation of reforms but offered no new specific measures in a speech that marked the 40th anniversary of China’s move towards market liberalization.

Oil prices meanwhile extended losses on signs of oversupply in the United States and as investor sentiment remained under pressure from concern over global economic growth and fuel demand.

US crude fell as low as $47.84 per barrel, its lowest since September last year. Brent crude oil futures fell 3% to $57.79 per barrel.