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Global stocks set to post worst year since 2008 financial crisis

Global stocks were on Friday set to close out the worst year since the 2008 financial crisis after the battle by central banks to tame inflation and the war in Ukraine sent powerful waves rushing across asset markets.

The broad MSCI All-World index of developed and emerging market equities has shed nearly a fifth of its value in 2022, with bourses from Wall Street to Shanghai and Frankfurt all notching up significant losses.

Bond markets also endured heavy selling: the US 10-year government bond yield, a global benchmark for long-term borrowing costs, has shot up to 3.8 per cent from about 1.5 per cent at the end of last year — the biggest annual increase on Bloomberg records stretching to the 1960s.

A 9 per cent surge in the US dollar against a basket of half a dozen major peers has placed further pressure on many markets. Developing economies have taken an especially big hit, since they often borrow in dollars and many key imports, such as crude oil, are priced in the US currency.

The grim year for financial markets came as central banks led by the US Federal Reserve ratcheted up borrowing costs in an attempt to control the worst spell of inflation in decades. Rapid increases in interest rates globally dealt a particularly powerful blow to many high-growth companies that prospered when central banks and governments provided a flood of stimulus measures to support the global economy during the 2020 coronavirus crisis.

“We had this situation for years where equities and bonds were both expensive because they were the same game, driven by low inflation and low interest rates,” Luca Paolini, chief strategist at Pictet Asset Management said. “The lesson of this year is that at some point there’s a day of reckoning, and when it comes it’s brutal.”

Line chart of Year to date % change showing A turbulent year for global markets

Tesla, the electric carmaker, has shed almost two-thirds of its value this year, while chipmaker Nvidia has dropped 50 per cent. US tech titans Apple and Microsoft have tumbled almost 30 per cent, while Google parent Alphabet is off nearly 40 per cent and Facebook owner Meta has plummeted 64 per cent.

Overall, the blue-chip US S&P 500 stock gauge is down 19 per cent this year, with the tech-focused Nasdaq Composite off 33 per cent. The value of the cryptocurrency market has tumbled by $1.7tn since the start of 2022, according to Financial Times data, in a sign of how the speculative fervour that took hold in 2020 has burst this year.

China’s sprawling equities markets also sustained a blow as the economy was disrupted by strict zero-Covid measures and the country is now battling a huge wave of infections as it opens up again. The CSI 300 measure of stocks in Shanghai and Shenzhen fell 22 per cent in local currency terms and 28 per cent in dollar terms.

The MSCI Europe index is down about 16 per cent in dollar terms, but a slimmer 11 per cent in euros.

Russia’s full-scale invasion of Ukraine in February further complicated the picture for investors, disrupting supply chains for key raw materials and further inflaming what had already been a severe bout of inflation. Commodities have been among the rare gainers in global markets this year: the broad S&P GSCI gauge has rallied 7 per cent, with energy and agriculture prices posting strong gains.

London’s FTSE 100, which is heavily weighted towards energy, mining and pharmaceutical companies, which have fared better in this year’s market shift, is up slightly for the year to date.

Column chart of Annual change in 10-year US Treasury yield (percentage points) showing US bond yields in historic rise

The intensity of this year’s market swings highlights the scale of regime change faced by global investors, who had grown accustomed to low interest rates since central banks deployed extraordinary measures to prop up the world economy during the 2008 financial crisis and the pandemic that followed 12 years later.

Higher interest rates dent the appeal of holding assets such as stocks and riskier debt because investors are able to earn better returns in cash or ultra-safe assets such as US, German or Japanese government bonds. Since higher rates make borrowing more expensive, they also tend to place pressure on the broader economy by tightening financial conditions for companies and businesses.

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