LONDON — World stocks attempted a move higher on Friday after four days of losses caused by mounting fears of economic downturn, even though the growth concerns were fanned further by data showing a sharp slowdown in China.
Markets enjoyed some relief from selling after two Fed policymakers on Thursday hosed down bets on an aggressive 100 basis-point (bps) interest rate rise this month.
But they did not dispel fears that central banks’ drive to get on top of galloping inflation will wallop the global economy.
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Recession fears were fanned further by data showing a sharp second-quarter slowdown in the China, reflecting the colossal hit from widespread COVID lockdowns. Annualized 0.4% growth was the worst since at least 1992, excluding early-2020 when the COVID pandemic erupted.
The data sent Chinese shares 1.7% lower and dragged an Asian ex-Japan index to two-year lows , while signs of property sector stress weighed on Hong Kong-listed developers.
“The recession angle is becoming stronger, backed by data showing things are cracking underneath the surface,” Salman Ahmed, global head of macro at Fidelity International.
He was referring to weakening economic data almost everywhere, contrasting with high inflation and tight labor markets.
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“We moved rapidly from a stagflationary set-up to more of a recession-dominated one, and very strong inflation is adding to fears that the Fed will need to do more front-loaded tightening.”
Bets had grown the Federal Reserve could raise rates by a full percentage points this month, following U.S. data showing a 9.1% inflation print. But Fed Governor Christopher Waller and St. Louis Fed President James Bullard, generally considered policy hawks, said on Thursday they favored a 75 bps move.
Markets still assign about a 45% chance to a bigger increase, but the comments eased a Wall Street sell-off and futures tip a flat to firmer opening for New York on Friday .
A pan-European equity index rose 0.7%, helped also by news Italy’s president had rejected Prime Minister Mario Draghi’s resignation. Italian shares bounced 0.9%, though they remain 5% lower on the week.
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Signs from companies’ second-quarter earnings, meanwhile, are not so far encouraging; a raft of European firms posted downbeat results on Friday, following Thursday’s below-forecast figures from big U.S. banks.
BONDS AND OIL
The Chinese data sent iron ore prices down 9.1%, while Brent crude futures fell $1 to $94.8 a barrel
Australia’s mining index touched a nine-month low, weighed further by a warning from Rio Tinto of labor shortages.
Bonds remained in demand, with U.S. Treasury yields falling around three bps across the curve. Two-year yields held around 17 bps above the 10-year segment, the so-called curve inversion that often presages recession.
Moves were even sharper in Europe, due to Italian political turmoil but also as money markets dialed back some bets on European Central Bank policy tightening by year-end .
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German 10-year yields fell 11 bps to 1.071%, the lowest since May 31.
Italy’s borrowing costs slipped after jumping on Thursday by around 20 bps but its yield premium over Germany was at the highest in a month.
Peter McCallum, rates strategist at Mizuho, said the latest developments put Italy in “a no-man’s land,” with no clarity on whether a new confidence vote might be scheduled.
“Until then we have uncertainty, essentially.”
The euro was flat, recovering slightly from two-decade lows around $0.9952, having slid 1.5% this week and having hit parity against the greenback for the first time in 20 years.
The yen, meanwhile, hurtled towards 140 per dollar, and last traded at 138.8, and the dollar index eased a touch.
U.S. retail sales data later on Friday will show how consumers are reacting to rate rises and signs of softer growth.
(Additional reporting by Tom Westbrook in Singapore and Yoruk Bahceli in London Editing by Mark Potter)
As Joe Biden this week hailed America’s booming economy as the strongest in the world during a reelection campaign tour of battleground-state Pennsylvania, global finance chiefs convening in Washington had a different message: cool it.
The push-back from central bank governors and finance ministers gathering for the International Monetary Fund-World Bank spring meetings highlight how the sting from a surging US economy — manifested through high interest rates and a strong dollar — is ricocheting around the world by forcing other currencies lower and complicating plans to bring down borrowing costs.
Canada’s Prime Minister Justin Trudeau and Finance Minister Chrystia Freeland hold the 2024-25 budget, on Parliament Hill in Ottawa, on April 16.Patrick Doyle/Reuters
Alex Whalen and Jake Fuss are analysts at the Fraser Institute.
Amid a federal budget riddled with red ink and tax hikes, the Trudeau government has increased capital gains taxes. The move will be disastrous for Canada’s growth prospects and its already-lagging investment climate, and to make matters worse, research suggests it won’t work as planned.
Currently, individuals and businesses who sell a capital asset in Canada incur capital gains taxes at a 50-per-cent inclusion rate, which means that 50 per cent of the gain in the asset’s value is subject to taxation at the individual or business’s marginal tax rate. The Trudeau government is raising this inclusion rate to 66.6 per cent for all businesses, trusts and individuals with capital gains over $250,000.
The problems with hiking capital gains taxes are numerous.
First, capital gains are taxed on a “realization” basis, which means the investor does not incur capital gains taxes until the asset is sold. According to empirical evidence, this creates a “lock-in” effect where investors have an incentive to keep their capital invested in a particular asset when they might otherwise sell.
For example, investors may delay selling capital assets because they anticipate a change in government and a reversal back to the previous inclusion rate. This means the Trudeau government is likely overestimating the potential revenue gains from its capital gains tax hike, given that individual investors will adjust the timing of their asset sales in response to the tax hike.
Second, the lock-in effect creates a drag on economic growth as it incentivizes investors to hold off selling their assets when they otherwise might, preventing capital from being deployed to its most productive use and therefore reducing growth.
And Canada’s growth prospects and investment climate have both been in decline. Canada currently faces the lowest growth prospects among all OECD countries in terms of GDP per person. Further, between 2014 and 2021, business investment (adjusted for inflation) in Canada declined by $43.7-billion. Hiking taxes on capital will make both pressing issues worse.
Contrary to the government’s framing – that this move only affects the wealthy – lagging business investment and slow growth affect all Canadians through lower incomes and living standards. Capital taxes are among the most economically damaging forms of taxation precisely because they reduce the incentive to innovate and invest. And while taxes on capital gainsdo raise revenue, the economic costs exceed the amount of tax collected.
Previous governments in Canada understood these facts. In the 2000 federal budget, then-finance minister Paul Martin said a “key factor contributing to the difficulty of raising capital by new startups is the fact that individuals who sell existing investments and reinvest in others must pay tax on any realized capital gains,” an explicit acknowledgment of the lock-in effect and costs of capital gains taxes. Further, that Liberal government reduced the capital gains inclusion rate, acknowledging the importance of a strong investment climate.
At a time when Canada badly needs to improve the incentives to invest, the Trudeau government’s 2024 budget has introduced a damaging tax hike. In delivering the budget, Finance Minister Chrystia Freeland said “Canada, a growing country, needs to make investments in our country and in Canadians right now.” Individuals and businesses across the country likely agree on the importance of investment. Hiking capital gains taxes will achieve the exact opposite effect.
Nigeria’s economy, which ranked as Africa’s largest in 2022, is set to slip to fourth place this year and Egypt, which held the top position in 2023, is projected to fall to second behind South Africa after a series of currency devaluations, International Monetary Fund forecasts show.
The IMF’s World Economic Outlook estimates Nigeria’s gross domestic product at $253 billion based on current prices this year, lagging energy-rich Algeria at $267 billion, Egypt at $348 billion and South Africa at $373 billion.
