Stocks on Wall Street began trading on Tuesday with a modest gain, a day after a rush of selling pushed the S&P 500 into a bear market, leaving the index more than 20 percent below its recent peak.
The index rose 0.3 percent in early trading, even as European markets reversed their own gains and sunk deeper into the red. Markets in the Asia-Pacific region had recovered from the worst of their declines Tuesday, but still ended lower.
Government bond yields — a measure of borrowing costs — pulled back slightly from their highs after spiking on Monday.
Still, global markets are on shaky ground as multi-decade highs in inflation, supply-chain shortages and geopolitical tensions weigh on the outlook for growth around the world.
In the United States, inflation is accelerating at its fastest pace since 1981, amplifying worries about the direction of the economy as surging prices squeeze household budgets and company profits. On Friday, data showed the annual inflation rate climbed to 8.6 percent in May, defying economist expectations that it held steady.
As gas, food, rents and other expenses rise sharply, the Federal Reserve, at its meeting on Wednesday, is expected to discuss making the biggest interest rate increase since 1994. It will announce its latest policy decision on Wednesday, and many investors are betting that rates will rise by three-quarters of a percent.
The turmoil in recent days is a reaction to Friday’s inflation data, said Hugh Gimber, a strategist at JPMorgan Asset Management in London. Before that, “the narrative was inflation has peaked, it’s coming down and therefore the pressure is going to ease on the Fed,” he said.
“That got completely knocked on its head,” he added. “It was a really ugly inflation report and it’s put the Fed under real pressure” to demonstrate how serious it is about bringing inflation down.
Mr. Gimber said he also expected the Fed to raise rates by 0.75 percentage point on Wednesday. The policymakers’ “message is going to be that nothing is off the table until we see signs that the inflation path is improving,” he said.
For the Fed, it’s a tricky balancing act. If the central bank moves too aggressively to rein in inflation, it could put the brakes on the U.S. economy and cause a recession.
Such concerns have driven the sell-off in markets in the United States this year. On Monday, the S&P 500, the benchmark stock index, lost 3.9 percent, wiping out $1.28 trillion in market value. Since reaching a record high in January, the S&P 500 has fallen 22 percent, marking the seventh bear market in the last 50 years.
The weakness in stock markets continued in the Asia-Pacific region on Tuesday, although some markets pared their losses by the close. Japan’s Nikkei index was down 1.3 percent, while in Australia, the key stock index tumbled about 3.5 percent, the biggest single-day drop in two years.
Stock indexes across Europe opened higher but then slumped. The Stoxx Europe 600 fell 0.6 percent, after climbing as much as 1 percent, extending its losses into a sixth consecutive day.
On Tuesday, government bond yields retreated from their recent highs. The yield on 10-year U.S. Treasury notes fell to 3.30 percent. The day before as stocks plunged, the yield jumped to 3.36 percent, the highest since 2011.
At the same time, cryptocurrencies continued their decline amid a series of market crashes. On Monday, Celsius Network, an experimental cryptocurrency bank, froze withdrawals, panicking depositors. Bitcoin slumped to its lowest since 2020. By early morning in New York, it fallen 7 percent in the past 24 hours, according to CoinMarketCap.
Investors have been trying to make sense of what’s happening in the global economy.
The World Bank issued a grim warning last week, saying recession will be hard for many countries to avoid. On Monday, the credit rating firm Fitch cut its 2022 forecast for global gross domestic product, or G.D.P., to 2.9 percent, from a March estimate of 3.5 percent. These are just the latest in a series of global economic downgrades as Russia’s protracted war in Ukraine strains already stretched global supply chains, disrupts trade and pushes up the prices of oil, wheat, metals and other essential commodities.
As inflation surges, central banks around the world from Australia to Canada have been moving to raise rates. On Thursday, the Bank of England is expected to raise its benchmark rate for a fifth consecutive meeting. Last week, the European Central Bank said it would raise its rates next month for the first time in more than a decade.
On Tuesday, a German measure of investor confidence rose slightly but still remained deep in negative territory as economic growth faces a considerable number of risks.
“Judging by the meltdown in markets this week, however, as investors face up to the risk of shock and awe from the Fed, and a series of rate hikes in the eurozone,” it’s doubtful the rise in investor confidence “will be sustained,” Claus Vistesen, an economist at Pantheon Macroeconomics, wrote in a note.
With the global economic outlook weakening, traders are questioning how far central banks can go in raising rates to impede inflation without worsening the stress on companies and households.
“It’s really difficult for central banks to acknowledge that growth and inflation trade-off until inflation has peaked,” Mr. Gimber said. Later in the year, central banks might take a softer tone, but in the meantime, “with inflation heading in the wrong direction, they have to be focused on sending the signal that they are doing everything within their control to tackle that,” he said.
In its forecasts, Fitch cited concerns about “restrictive” monetary policy and inflation, noting that the supply disruptions from the war between Russia and Ukraine are having a “swifter impact on European inflation than expected.”
China is also complicating the picture. As the Chinese government doggedly pursues a zero-Covid strategy, the resulting lockdowns and restrictions have crimped China’s growth and added to the global supply chain woes. Chinese officials are increasingly concerned about the state of the economy, raising doubts that the country will meet its growth targets.
Fitch also slashed growth projections for China because it did not expect the economy to bounce back quickly given the government’s commitment to the zero-Covid policy.