The market storm is gaining strength as almost no asset class is excluded

The TSX and S&P 500 are being hit hard as the sell-off gets ugly

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Global markets came under more pressure on Friday as the mood over the economic outlook around the world worsened. Stocks, Currencies and Other Asset Classes – Almost nothing has survived the economic hurricane that has been building over the past few weeks. Here’s what economists and analysts see during this trading day:

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Markets are in turmoil

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Indices are dropping across the board in Friday’s trading. The S&P TSX Composite Index was down more than 2.8 percent to 18,463 as of 1:45 pm ET as energy stocks fell to their lowest levels in more than two months and oil prices fell 6 percent.

US markets were not doing better. The S&P 500 fell about 2.3 percent to 3,672 by 1:45 p.m. ET and the Dow was down more than 2 percent to 29,447. Goldman Sachs Group Inc. Its target for the S&P 500 is 4,300 to 3,600 by the end of the year, indicating a shift in interest rate expectations and how they will affect stocks.

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The turmoil began on Friday in European and Asian markets.

“There is no risk appetite on Friday morning, with stocks across Europe down as much as three per cent, led by the FTSE MIB,” BMO economists Jennifer Lee and Shelley Koshik said in their morning notes. “Asia was spared, as the region was sold off broadly, with Hang Seng down more than 1 percent, while the CSI 300 kept its losses at 0.3 percent.”

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Strategists at Bank of America Corp. cite a “cash is king” attitude among investors who display the most pessimistic attitude toward markets since the 2008 global financial crisis. Cash inflows were $30.3 billion as global equity fund outflows went to $7.8 billion Bonds lost $6.9 billion, and investment in gold fell by $400 million during the week of September 21, according to the bank.

Canadian retail downturn

Recent retail data from Canada was also disappointing on Friday, as sales fell 2.5 percent in July as lower gasoline prices contributed to the decline. While Canadians were saving money on fuel, the sudden cash gains didn’t go to other retailers, Royce Mendes, managing director and head of macro strategy at Desjardins, said in a note after the data. Mendes also said the modest 0.4 percent rebound in nominal retail sales estimated by Statistics Canada for August could point to larger volumes.

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“However, the trend is clear, and consumers are pulling back on spending,” Mendes said. “The slowdown in consumption is very much in line with what the Bank of Canada is trying to engineer with its rate increases.”

The Bank of Canada was aiming to rebalance high demand with constrained supply by implementing a rate-raising cycle this year, which has so far raised the policy rate by three percentage points.

pound plunge

Across the pond, the British pound fell 2 percent to collapse below $1.11 for the first time since 1985, adding to the pressure the currency faced earlier in the week. The drop came as newly appointed British Prime Minister Liz Truss introduced the country’s largest tax cut since the early 1970s.

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Carl Chamota, chief market strategist at Cambridge Global Payments in Toronto, said the recent weak retail data exacerbated fears of a deep and prolonged recession, which contributed to the pound’s grief.

The Bank of England raised its key interest rate by 50 basis points to 2.25 per cent this week, which Chamota had indicated, before the decision, would help widen interest rate differentials against sterling.

Don’t fight the Fed. just don’t

US Federal Reserve Chairman Jerome Powell flattered Jackson Hole’s comments in late August that the central bank was willing to trade off economic growth if it meant eliminating decades of high inflation. The Fed’s 75 basis point hike earlier this week showed Powell wasn’t a cheat, and economist David Rosenberg of Rosenberg Research & Associates Inc.

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“Which part of ‘Not Fighting the Fed’ Markets Don’t Understand?” Rosenberg asked in his Friday morning note to clients. “President Powell’s message is clear: The Fed means it this time, not bluffing or bluffing/in vain.”

“Whether the Fed is right or wrong in what it is doing, it is in control of the ‘magic leverage,’ and therefore investors must be prepared for further economic and market weakness,” Rosenberg added.

High risk of recession

More economists say recession risks are rising. Bank of Montreal chief economist Douglas Porter said the risks of a North American recession over the next year have now risen to more than 50 per cent.

“Accordingly, we are adjusting our forecasts to reflect a moderate slowdown in the first half of 2023 in both the US and Canadian economies,” Porter said in a note dated September 23.

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Porter added that persistent inflation and the increased risk of monetary policy overrun with rapidly rising interest rates increase these risks.

“Financial markets are now fully absorbing the Fed’s harsh message that there will be no backing away from the fight against inflation. Sharp support in global rates has taken more hits in equities, resource prices and commodity currencies this week as the prospect of a recession grows,” Porter said.

Similarly, Desjardins’ recent note stated that with the Fed’s “focus on containing inflation,” the odds of a recession triggered by aggressive policy moves rose.

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