Stock and currency volatility adds to recession worries
U.S. and European stocks fell on Friday, the dollar hit a 22-year high and bonds sold off again as fears grew that a central bank prescription to raise interest rates to rein in the inflation will drive major economies into recession.
The Dow Jones narrowly missed confirmation of a bear market as a growing slowdown in business activity in the euro zone and a contraction in business activity in the United States for a third consecutive month in September left Wall Street wallowing in a sea of red.
Britain’s currency and debt prices weakened further after the UK government announced huge debt-funded tax cuts that will boost borrowing, pushing UK bond yields to their biggest daily increases in decades. decades.
The euro fell to a 20-year low and the pound to a 37-year low, while the dollar rose after the Federal Reserve signaled this week that rates would be higher for longer.
George Goncalves, head of US macro strategy at MUFG, said the Fed wanted tighter financial conditions and high interest rates were the mechanism to create a market investors hadn’t seen in a long time.
“It’s something we’re not used to, that’s why it’s more surprising to most,” he said. “It’s going to be a long competition between the Fed and the markets, and in the middle is the economy not yet reacting to this tightening.”
The MSCI global equity index fell 2.07% to near two-year lows. The pan-European STOXX 600 index closed down 2.34%, its biggest weekly loss in three months.
On Wall Street, the Dow Jones Industrial Average fell 1.62%, the first major US stock index to fall below its June low on an intraday basis. But the blue-chip index avoided confirming a bear market as it missed the close by 20% or more below its all-time high, by a widely used definition.
The S&P 500 and the Nasdaq Composite, already in bearish territory, fell 1.72% and 1.85 respectively.
Britain, Sweden, Switzerland, Norway and others also raised rates this week. But the Fed’s signal that it expects high U.S. rates to persist through 2023 sparked the stock and bond market rout.
Investors are trying to keep inflation and rate movements under control, said Andrzej Skiba, head of the BlueBay U.S. fixed income team at RBC Global Asset Management.
“There is market unease in trusting that we know how inflation is going to move and that yields will indeed peak in the mid-4s,” he said, referring to a Fed projection. the federal funds rate to 4.6% at the end of 2023.
“People have been thinking about this uncertainty and it could mean more tightening ahead, it could mean even more tightening of financial conditions that markets have to navigate.”
The euro fell for a fourth straight day, slipping 1.49% to $0.9689 after data showed the slowdown in Germany’s economy worsened in September. The dollar index rose 1.6%.
The Japanese yen weakened 0.68% to 143.34 to the dollar, but failed to post its first weekly gain in more than a month. On Thursday, Japanese authorities stepped in to support the currency for the first time since 1998.
UK bond prices fell, with five-year gilt yields jumping 51.4 basis points to 4.052%, the biggest one-day rise since at least the end of 1991, Refinitiv data showed, after that the government unveiled tax cuts. The price of a bond moves against its yield.
The pound fell 3.49% to $1.0864 in its biggest single-day decline since March 2020, when the COVID-19 pandemic rocked markets. The pound was already under pressure before the announcement of the tax cut, down 11% since the beginning of July.
“Generally, looser fiscal policy and tighter monetary policy are a positive mix for a currency – if it can be funded with confidence,” said Chris Turner, global head of markets at ING.
“Here’s the catch – investors are having doubts about the UK’s ability to finance this package, hence the underperformance of gilts.”
The dollar hit its highest level in two decades and extended its double-digit gains for the year against several currencies.
Yields on benchmark 10-year U.S. Treasuries have soared as investors dump inflation-sensitive assets. Losses on global government bonds are on track for the worst year since 1949, BofA Global Research said in a note.
Yields on 10-year Treasury Inflation-Protected Securities (TIPS), which take into account expected inflation and are known as real yields, rose to 1.426%, the highest since February 2011.
The yield curve inversion between two- and 10-year bonds reached minus 58 basis points on Thursday, the most inverted in at least two decades, and was the last at minus 51.6 basis points, indicating fears of an impending recession.
Eurozone bond yields also rose sharply, with the Italian 10-year rising to 4.294%, its highest since late 2013, ahead of Sunday’s Italian elections.
Oil prices plunged about 5% to an eight-month low. The extremely strong dollar made crude more expensive in other currencies and recession fears weighed on the demand outlook.
Brent crude futures settled $4.31 to $86.15 a barrel, while U.S. crude fell $4.75 to $78.74.
Gold prices fell to their lowest level since April 2020 as the rising dollar and rising Treasury yields hurt bullion, which earns no interest.
US gold futures settled down 1.5% to $1,655.60.
Bitcoin fell 2.57% to $18,904.00.
Copyright 2022 Thomson/Reuters