Central banks have provided very little Christmas cheer for stock markets this week

Hong Kong (AFP) - Most stock markets fell Friday as investors contemplated interest rates going higher than expected for an extended period after central banks reaffirmed their commitment to bringing down inflation.

After a healthy rally in recent weeks fuelled by signs that price rises were slowing, the US Federal Reserve and European Central Bank this week crushed any Christmas spirit by hiking borrowing costs again and warning of more pain to come.

While inflation in most countries has started coming down from the levels seen earlier this year – helped by a drop in energy costs – it remains at multi-decade highs.

And observers have warned that economies could be heading for a period of stagflation where prices keep rising but growth stalls.

After a rough week for markets, anxiety was enhanced on Wednesday after the Fed hiked rates as expected but indicated they would likely have to go higher than had been forecast, ramping up fears of a recession.

That was followed by similar moves by the ECB on Thursday, with its boss Christine Lagarde warning: “We have more ground to cover, we have longer to go and we are in for a long game.”

The Bank of England also lifted rates and said more hikes were on the cards.

The decisions came as data also showed that almost a year of monetary tightening was hitting the economy more and more, with US retail sales dropping in November as American consumers – the key driver of growth – began to feel the pinch.

- Recession on horizon? -

“With central banks on both sides of the pond suggesting they have more work to tame inflation, hiking interest rates into a dimming macro environment will undoubtedly trigger a recession,” said SPI Asset Management’s Stephen Innes.

“The question is just how profound. Forget inflation; Asia traders are now worried about a global recession.”

All three main indexes on Wall Street tumbled Thursday, with the Nasdaq losing more than three percent as tech firms took another blow.

And the losses carried through to Asia, where Tokyo gave up 1.9 percent while Sydney, Seoul, Singapore, Mumbai, Taipei, Bangkok and Manila were also in the red. Shanghai was barely moved.

However, the dollar eased back slightly after Thursday’s rally.

Hong Kong rose, supported by signs of progress in talks on allowing US officials to audit Chinese firms listed in New York, easing concerns about a possible delisting of some big names such as Alibaba and Tencent.

The news provided a little more help to Hong Kong traders, whose sentiment has been lifted by China’s shift away from the economically damaging zero-Covid policy as well as moves to open the city further to overseas visitors.

And a report in the city’s South China Morning Post said the border with mainland China would be fully reopened next month, providing another much-needed boost to the beleaguered economy.

However, the mood was soured a little by a US decision to put 36 Chinese companies including top producers of advanced computer chips on a trade blacklist, severely restricting their access to any US technology.

London, Paris and Frankfurt opened mixed a day after suffering hefty losses.

- Key figures around 0820 GMT -

Tokyo - Nikkei 225: DOWN 1.9 percent at 27,527.12 (close)

Hong Kong - Hang Seng Index: UP 0.4 percent at 19,450.67 (close)

Shanghai - Composite: FLAT at 3,167.86 (close)

London - FTSE 100: DOWN 0.1 percent at 7,418.88

Euro/dollar: UP at $1.0640 from $1.0627 on Thursday

Dollar/yen: DOWN at 137.16 yen from 137.80 yen

Pound/dollar: UP at $1.2200 from $1.2175

Euro/pound: DOWN at 87.25 pence from 87.26 pence

West Texas Intermediate: DOWN 0.5 percent at $75.77 per barrel

Brent North Sea crude: DOWN 0.3 percent at $80.99 per barrel

New York - Dow: DOWN 2.3 percent at 33,202.22 (close)