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Global stocks drop on recession and central bank rate rise worries

US and European stocks slid on Monday as the outlook for big global economies darkened and investors braced themselves for a major central bank summit.

Wall Street’s broad S&P 500 dropped 1.2 per cent at the New York opening bell, after snapping a four-week winning streak on Friday. The technology-focused Nasdaq Composite gauge fell 1.5 per cent. In Europe, the regional Stoxx 600 lost 1 per cent, with Germany’s Dax tumbling 2 per cent.

Monday had started on a bearish note as a fresh surge in European gas and power prices added to fears that the region could slump into recession.

The growing sense of economic gloom comes as economists expect Jay Powell, the Federal Reserve chief, to signal at this week’s Jackson Hole economic meeting that the central bank will continue to aggressively increase interest rates as it battles elevated inflation.

“I wouldn’t bank on Powell giving a strong signal at Jackson Hole that he’s ready to change direction on inflation,” said Joost van Leenders, senior investment strategist at Van Lanschot Kempen. “[He’ll] justify why they are raising rates so fast and why they have to.”

Global developed market stocks had rebounded strongly in July following a historic first-half rout, and were still up for August as of Friday’s close. However, many investors have called into question the durability of the recent rally given the powerful economic headwinds that are expected for the remainder of this year and into 2023.

“I’m not buying into this relief rally. I think we’re in for more downside for risk markets for the rest of the year,” said Jamie Niven, a senior fund manager at Candriam.

Attention is expected to shift towards the summit in Jackson Hole, Wyoming at the end of this week as investors look for clues on the extent to which the Fed will tighten policy after a series of sharp rate rises earlier this year.

“We continue to expect a relatively hawkish speech from chair Powell at Jackson Hole on Friday,” said Andrew Hollenhorst, economist at Citigroup.

He noted that US Treasury yields and the dollar have both been rising recently as investors shift to expecting a more powerful Fed policy tightening even after the US inflation rate ticked slightly lower in July from June.

The policy sensitive two year Treasury yield traded at 3.31 per cent on Monday, from around 2.5 per cent in late May and less than 1 per cent at the end of last year. Meanwhile, the dollar has climbed 2.4 per cent this month against a basket of half a dozen major currencies and is nearing the two decade high it reached in July.

Elsewhere, mainland Chinese shares bounced on Monday after the People’s Bank of China slashed its mortgage lending rate for the second time this year, in an effort to support its debt-laden real estate sector. The CSI 300 gauge of Shanghai and Shenzhen-listed stocks rose 0.7 per cent.

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