Global stock markets sharply fell on Friday as investors continued to be rattled by growing fears of a recession, after more interest rate hikes by central banks to stave off stubbornly high inflation.
With no signs of consumer price increases abating, central banks around the world stepped up their fight against inflation by raising interest rates once again.
They are arguing that dealing with short-term pain as a result of these hikes would be better than the potential long-term damages of not acting now.
The US Federal Reserve announced another decision to raise borrowing costs by 75 basis points (bps), with a warning that more hikes were being planned and rates would only go down in 2024.
Other central banks followed suit, with the Bank of England (BoE) opting for a 50bps increase, while the Swiss National Bank raised its rates by 75bps. The Bank of Japan, however, bucked the trend and kept its rates unchanged.
"A busy week for central banks come to an end with plenty of rate hikes and increased prospects of slowing growth that leave investors with a bad taste in their mouth," said Ipek Ozkardeskaya, a senior analyst at Swissquote Bank.
On Wall Street, the Dow Jones Industrial Average fell 1.6 per cent, sinking to its lowest level this year and worst since late 2020, while the tech-heavy Nasdaq Composite slipped 1.8 per cent.
The S&P 500 declined 1.7 per cent, hovering close to its 2022 low set in mid-June, as about 85 per cent of its stocks ended in the red.
In Europe, stocks also fell after preliminary data suggested business activity is poised to show its worst monthly contraction since early 2021.
London's FTSE 100 and Frankfurt's DAX both settled 2 per cent lower, while Paris's CAC 40 declined 2.3 per cent.
Britain's new plan to cut taxes also added to the pressure on stock markets. This sent UK yields soaring, because the decision could ultimately force the BoE to raise rates higher.
Former US Treasury secretary Lawrence Summers on Friday criticised the economic policies being adopted by new UK Prime Minister Liz Truss, arguing that these are creating the circumstances for the pound to sink past parity with the US dollar.
“It makes me very sorry to say, but I think the UK is behaving a bit like an emerging market turning itself into a submerging market,” he told Bloomberg Television.
"The British pound is getting absolutely smashed after the UK’s new economic reform announcements. Investors are losing confidence in the UK’s ability to control its finance as the government continues to kick the can down the road," Naeem Aslam, chief market analyst at Avatrade.
"The UK’s government is avoiding reducing the country’s liabilities, but under the current circumstances, it has very little option to do anything else."
Earlier in Asia, Hong Kong's Hang Seng Index dropped 1.2 per cent and the Shanghai Composite retreated 0.7 per cent. Tokyo's Nikkei 225 was closed for a holiday.
"A negative end to the week in Asia, and Europe has quickly followed as the prospect of much more tightening and a recession weighs on sentiment," said Craig Erlam, an analyst at trading platform Oanda.
Oil prices also closed sharply lower on Friday, dropping to eight-month lows, triggered by traders' recession fears.
Brent lost 4.76 per cent and West Texas Intermediate gave up 5.69 per cent as both recorded a fourth straight week of losses — the first time both benchmarks lost in that span since December 2020.
Gold, meanwhile, dropped to its lowest level since the early days of the Covid-19 pandemic, also affected by the broad market sell-off following interest rate hikes by central banks.
Spot gold slipped 1.6 per cent to close at $1,643.94 an ounce for a second consecutive weekly loss. Bullion for December delivery dropped 1.5 per cent to settle at $1,655.60 an ounce on the Comex.