Despite a significant rate increase, stocks decline as economic concerns linger

Global stock markets tumbled on Wednesday as investors fretted over the outlook for economic concerns growth and inflation amid rising COVID-19 cases and supply chain disruptions. The New Zealand dollar soared after the country’s central bank raised interest rates by a larger-than-expected 50 basis points, becoming the first developed economy to tighten monetary policy since the pandemic began.

The MSCI world equity index, which tracks shares in 50 countries, fell 0.4% to its lowest level in more than two weeks. European stocks also dropped, with the pan-European STOXX 600 index down 0.8%, led by losses in the energy, mining, and banking sectors. U.S. stock futures pointed to a lower open on Wall Street, with the S&P 500 futures down 0.5%.

Investors were spooked by a slew of disappointing data from China, the world’s second-largest economy and a key driver of global growth. China’s factory activity contracted in August for the first time since April 2020, as the Delta variant of the coronavirus and floods disrupted production and dented demand. China’s services sector also shrank for the first time since February 2020, adding to fears of a slowdown in the country’s recovery.

“The Chinese data was a wake-up call for markets that have been complacent about the risks of a global growth slowdown,” said Hussein Sayed, chief market strategist at FXTM. “Investors are also worried about the impact of higher inflation on consumers and businesses, especially as central banks are starting to withdraw their stimulus.”

The New Zealand dollar was the standout performer in the currency market, surging 1.2% to a three-month high of $0.7116 after the Reserve Bank of New Zealand (RBNZ) lifted its official cash rate from 0.25% to 0.75%, citing strong economic concerns growth and inflation pressures. The move surprised some analysts who had expected a smaller 25 basis point hike or no change at all, given the recent lockdown measures to contain a COVID-19 outbreak.

“The RBNZ has sent a clear signal that it is not willing to tolerate inflation above its target range and that it is confident that the economy can withstand higher interest rates,” said Lee Hardman, currency analyst at MUFG. “The kiwi dollar is likely to remain well supported in the near term as markets price in further rate hikes from the RBNZ.”

Other major currencies were little changed, with the dollar index holding steady at 92.65 against a basket of six rivals. The euro was flat at $1.1805, while the British pound edged up 0.1% to $1.3778. The Japanese yen was also steady at 110.05 per dollar.

In bond markets, the yield on the benchmark 10-year U.S. Treasury note slipped one basis point to 1.30%, as investors sought safety amid the risk-off mood. The yield on the 10-year German bund also fell one basis point to -0.40%.

Oil prices extended their losses from Tuesday when they tumbled more than 3% on concerns over weaker demand and rising supply. Brent crude futures dropped 1% to $70.77 a barrel, while U.S. West Texas Intermediate (WTI) crude futures fell 1.2% to $67.97 a barrel.

Gold prices edged up 0.2% to $1,814 an ounce, supported by lower bond yields and a softer dollar.

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