Global stocks were set to close Friday’s worst year since the 2008 financial crisis as central banks’ battle to curb inflation and the war in Ukraine sent powerful waves across asset markets.
The broad MSCI All-World index of developed and emerging market equities has lost nearly a fifth of its value in 2022, with stock exchanges from Wall Street to Shanghai and Frankfurt all recording significant losses.
Bond markets also suffered heavy selling: yields on US 10-year government bonds, a global measure of long-term borrowing costs, have risen from around 1.5 percent at the end of last year to 3.8 percent – the largest annual increase since Bloomberg records stretching to the 1960s.
A 9 percent rise in the US dollar against half a dozen major competitors has put further pressure on many markets. Developing economies have been particularly hard hit, as they often borrow in dollars and many major imports, such as crude oil, are priced in US currency.
The grim year for financial markets began as central banks, led by the US Federal Reserve, pushed up borrowing costs in an attempt to contain the worst period of inflation in decades. Rapid rises in interest rates worldwide dealt a particularly powerful blow to many high-growth companies that thrived as central banks and governments launched a flurry of stimulus to support the global economy during the 2020 coronavirus crisis.
“We’ve had this situation for years where stocks and bonds were both expensive because they were the same game, driven by low inflation and low interest rates,” said Luca Paolini, chief strategist at Pictet Asset Management. “The lesson of this year is that at some point there will come a day of reckoning, and when it comes, it’s brutal.”
Tesla, the electric car maker, has lost nearly two-thirds of its value this year, while chipmaker Nvidia has lost 50 percent. US tech giants Apple and Microsoft are down nearly 30 percent, while Google parent Alphabet is nearly 40 percent off and Facebook owner Meta is down 64 percent.
Overall, blue-chip US S&P 500 stocks are down 19 percent this year, while the tech-focused Nasdaq Composite is down 33 percent. The value of the cryptocurrency market has plummeted by $1.7 trillion according to the start of 2022 Data from the Financieele Dagbladin a sign of how the speculative fervor that erupted in 2020 has erupted this year.
China’s sprawling stock markets also took a hit as the economy was disrupted by strict zero-Covid measures and the country is now battling a massive wave of infections as it reopens. The CSI 300 measure of shares in Shanghai and Shenzhen fell 22 percent in local currency terms and 28 percent in dollar terms.
The MSCI Europe index is down about 16 percent in dollars, but a smaller 11 percent in euros.
Russia’s massive invasion of Ukraine in February further complicated the picture for investors, disrupting supply chains for key commodities and fueling already severe inflation. Commodities were among the rare winners in global markets this year, with the broad S&P GSCI gauge up 7 percent and energy and agricultural prices posting strong gains.
The London FTSE 100, which has a strong focus on energy, mining and pharmaceutical companies, which have outperformed in this year’s market shift, is up slightly so far.
The intensity of this year’s market swings highlights the magnitude of regime change faced by global investors, who had become accustomed to low interest rates since central banks took extraordinary measures to support the global economy during the 2008 financial crisis and the pandemic that followed 12 years later.
Higher interest rates reduce the appeal of holding assets like stocks and riskier debt because investors can get better returns in cash or ultra-secure assets like US, German or Japanese government bonds. As higher rates make borrowing more expensive, they also tend to put pressure on the wider economy by tightening financial conditions for companies and businesses.