- Dow about to confirm bear market
- MSCI All-World Index hits two-year low
- Dollar hits new two-decade high
- Sterling and Gilts Sell Off Following UK ‘Mini-Budget’
NEW YORK/LONDON, Sept 23 (Reuters) – U.S. and European stocks tumbled on Friday, the dollar hit a 22-year high and bonds sold again as fears grew that the central bank’s prescription for raising interest rates to control inflation would drag large economies into recession.
The Dow Jones (.DJI) came close to confirming a bear market, as a deepening slump in Eurozone business activity and US business activity contracting for the third consecutive month in September, left Wall Street wallowing in a sea of red.
British assets weakened further after the UK government announced huge debt-financed tax cuts that will boost borrowing, sending UK bond yields soaring to their biggest daily gains in decades. read more
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The euro slumped to a 20-year low and sterling to a 37-year low, while the dollar soared 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 financial conditions to tighten and high interest rates were the mechanism for generating a market that investors hadn’t seen in a long time.
“It’s something we’re not used to, so it’s more surprising to most,” he said. “It’s going to be a long race between the Fed and the markets, and in the middle is the economy that is not yet responding to this tightening.”
The MSCI World Stock Index (.MIWD00000PUS) lost 2.28% to a nearly two-year low. The pan-European STOXX 600 Index (.STOXX) closed down 2.34%, its biggest weekly loss in three months.
On Wall Street, the Dow Jones Industrial Average (.DJI) fell 1.88%, the first major US stock index to fall below its June low on an intraday basis.
The S&P 500 (.SPX) lost 2.03% and the Nasdaq Composite (.IXIC) fell 2.06%.
Britain, Sweden, Switzerland, Norway and other countries also raised rates this week. But the Fed’s signal that it expects high US rates to persist through 2023 sent equity and bond markets tumbling.
Investors are trying to control inflation and how high rates will go, said Andrzej Skiba, head of the BlueBay US fixed income team at RBC Global Asset Management.
“There is trepidation in the market to be confident that we know how inflation will play out and that yields will peak in the mid-upper 4s,” he said, referring to a Fed projection of the fed funds rate at 4 .6% at the end of 2023.
“People have been mulling over that uncertainty and it could mean more tightening going forward, it could mean even more tightening of financial conditions that the markets have to go through.”
The euro fell for the fourth day in a row, falling 1.51% to $0.9687 after data showed the German economic slowdown worsened in September. The dollar index rose 1.609%.
The Japanese yen weakened 0.64% to 143.28 per dollar, but was still on track for 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 plummeted, with five-year gilt yields rising 51.4 basis points to 4.052%, the biggest one-day rise since at least the end of 1991, according to Refinitiv data, after after the government unveiled tax cuts. The price of a bond moves against its yield.
Sterling fell 3.48% to $1.0865 in its biggest single-day drop since March 2020 as the COVID-19 pandemic rattled markets. The pound was already under pressure before the tax cut announcement, down 11% since the beginning of July.
“Generally, looser fiscal policy and tighter monetary policy is a positive mix for a currency, if it can be financed with confidence,” said Chris Turner, global head of markets at ING.
“Here’s the rub: Investors have doubts about the UK’s ability to fund this package, hence the underperformance of gilts.”
The dollar hit its highest level in two decades and extended double-digit gains for the year against several currencies.
Yields on the benchmark 10-year US Treasury note have soared as investors dump inflation-sensitive assets. Global government bond losses are on track for the worst year since 1949, BofA Global Research said in a note.
The yield on the 10-year Treasury note fell 2.5 basis points to 3.683%.
A closely watched portion of the US Treasury yield curve that measures the gap between yields on two-year and 10-year Treasury notes, seen as a harbinger of a recession in a year or two, was -51.4 basis points.
Euro zone bond yields also rose sharply, with Italy’s 10-year bond hitting 4.294%, its highest level since late 2013, ahead of Sunday’s Italian election.
Oil prices fell about 5% to an eight-month low. The super strong dollar made crude more expensive in other currencies and fears of a recession weighed on demand prospects.
Brent crude futures settled down $4.31 at $86.15 a barrel, while US crude fell $4.75 to settle at $78.74.
Gold prices fell to their lowest level since April 2020 as a rally in the dollar and rising Treasury yields hurt bullion, which pays no interest.
US gold futures were down 1.5% at $1,655.60.
Bitcoin fell 3.48% to $18,727.00.
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Additional reporting by Tom Westbrook in Sydney and Joice Alves in London Editing by Kirsten Donovan, Angus MacSwan, Mark Potter and David Gregorio
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