Global markets and the nervous wait for the Fed cavalry

Alamy/Kristoffer Tripplaar

“Can it get any worse?” was the question last Friday as global equities markets closed nursing big losses.

When Asian, Middle East and European bourses opened on Monday with further steep falls, and fearing more red on the screens when Wall Street opened, the answer was clear: “Yes indeed it can.”

We can’t say we haven’t been warned. For the past month, global stocks have been staggering around, stumbling over and picking themselves up, before stumbling again, like a crowd of inebriated sailors.

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Even before they got a big shove from awful employment figures from the US at the end of last week, equities had been teetering.

Investors suddenly decided the “Magnificent Seven” stocks – Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla – were all promising more than they could deliver and were therefore overrated.

They took another body blow over the weekend as it emerged that legendary investor Warren Buffett had unloaded more than half his holding of Apple shares, raising $76 billion in cash.

He said he would hold onto the rest of his stake in the world’s most valuable company “unless something extraordinary happens” – hardly a ringing endorsement in a year when the extraordinary, in economics as in politics, has become almost mundane.

Another member of the “Seven” – chipmaker Nvidia – also reeled from a verdict by Elliott Management, a big US hedge fund, that it was a “bubble” stock, and its AI-driven shares were “overhyped”.

Movie fans will recall how only three of the Seven were left standing at the end of the film.

What turned these individual corporate valuation jitters into a general market rout was the sharp downturn in US new jobs. At a mere 114,000, this was far fewer than expected.

It was not even the low number that spooked markets into “correction” territory – it could have been a one-off, and summer holiday months are difficult to predict – but the fear that maybe US economic policy has been straying off course and that the possibility of a hard recessionary landing is back on the table.

The Federal Reserve under chairman Jerome Powell has been ever-so-slowly reducing interest rates after post-pandemic hikes to deal with inflation.

You might think that, having got inflation down to 2.5 per cent against a target of 2 per cent, Powell would think “job done” and let the economy loose again. But he turned down a chance to do that at the last Fed meeting, holding rates steady in a range 5.25 to 5.5 per cent.

It is hard to exaggerate how contentious this could all become in a febrile US election year. Incumbent Democrats do not want to go into November’s poll with accusations of economic failure ringing in their ears, while Republicans are certain to call “foul” if Powell comes up with a big pump-priming rate cut next month – as seems increasingly likely – if not before.

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As if all this volatility was not enough, the geopolitical backdrop is looking darker than ever, with most observers expecting a significant escalation in Middle East hostilities at any time.

But it was significant that the oil price went sharply down at the end of last week, implying that – for the time being at least – worries about global economic recession and the effect that would have on crude demand outweigh the supply-side concerns that would result from a spread of military action into the Arabian Gulf. 

No wonder the VIX Index – the “fear gauge” used by Wall Street to judge prospects for future market stability or otherwise – hit a four-year high last week. Seldom have there been so many negative factors in play in global markets at any one time.

Gulf markets followed the other global indices down last week and on Monday, but at a slower pace. The region still has all the familiar advantages – economic resilience, deep capital reserves and “safe haven” status – that have seen it through in the past.

But that could be deceptive. If correction turns into crash in the rest of the world, nowhere will be immune.

What should investors do now? Probably avoid the temptation to emulate Buffett by liquidating portfolios for cash – and wait for the Fed cavalry to arrive. But it could be a close-run thing.

Frank Kane is Editor-at-Large of AGBI and an award-winning business journalist. He acts as a consultant to the Ministry of Energy of Saudi Arabia and is a media adviser to First Abu Dhabi Bank of the UAE