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Wall Street collapses on negative macro tsunami

Wall Street collapses on negative macro tsunami
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  • US stocks fall
  • European, Asian stocks also fall
  • VIX fear gauge jumps 6%
  • Dollar strong after sterling plunge
  • Gold, oil down in choppy trading

September 26 (Reuters) – US stocks and oil prices fell in choppy trade on Monday, even as dollar and Treasury yields rose as Wall Street digested a slew of negative macroeconomic news.

With markets already jittery as central bank signals for further interest rate hikes were announced, the UK government’s budget plans released on Friday continued to roil markets. Sterling fell to record lows on Monday and a renewed sell-off in UK gilts pushed euro-zone bond yields higher.

US stocks were mixed at the start of the week but soon fell lower on Monday lunchtime. The Dow Jones Industrial Average (.DJI) and S&P 500 (.SPX) were both down nearly 1%, while the Nasdaq Composite (.IXIC) was down about 0.2%.

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Global equities also fell as concerns over high interest rates continued to weigh on the financial system, despite muted reaction to Italy’s election result in which a right-wing coalition won a clear majority.

Europe’s STOXX 600 index (.STOXX) slipped to hit a new low since December 2020, last down 0.4% on the day. Asian equities (.MIAPJ0000PUS) fell 1.7%.

“I think everyone felt like they were swimming in a tsunami of news last week after one of the most incredible macro weeks in recent memory,” Deutsche Bank strategist Jim Reid wrote in a note to clients on Monday.

This wave of mostly negative information sent Wall Street’s so-called fear index, the VIX (.VIX), up about 6% on the day — nearing levels not seen since October 2020.

The pound has slipped to an all-time low against the dollar, and was recently down around 1.4%. The Bank of England said on Monday it would not hesitate to change interest rates and was monitoring markets “very closely” after the pound plummeted.

Sterling’s decline is partly due to the strength of the dollar, which hit a fresh 20-year high of 114.58 in early trade. It was last seen at $114.06, up about 0.8%.

“The Bank of England is in a very difficult situation where if they don’t act they risk another collapse in sterling and things get very messy,” said Mike Riddell, Senior Portfolio Manager, Allianz Global Investors. “If it reacts, a developed market will raise interest rates to defend the currency looks like an emerging market. So they’re damned if they do, damned if they don’t.”

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STRESS DEVELOPMENT

European government bonds were also hit. Five-year UK government bond yields rose 50 basis points to their highest level since October 2008, pushing euro-zone bond yields higher. The 10-year German government bond yield hit its highest level since December 2011, DE10YT=RR, at 2.132%, and benchmark Italian bond yields rose to their highest level since 2013.

In the United States, US Treasury yields also rose to new highs on Monday, amid concerns that central banks around the world will tighten monetary policy to curb stubbornly high inflation.

Two-year government bond yields, which tend to be more sensitive to changes in interest rates, rose to a near 15-year high of 4.214%, and benchmark 10-year bond yields rose to 3.859%.

Oil prices hit a nine-month low in choppy trading on Monday, pressured by a stronger dollar as market participants awaited details on new sanctions against Russia.

US crude fell 2.15% to $77.05 a barrel and Brent was last traded at $84.30, down 2.15% on the day.

Spot gold fell 0.8% to $1,630.41 an ounce after falling to its lowest price since April 2020 at $1,626.41.

“There was economic logic at play, as central banks hiked rates to push monetary policy into a tightening zone, fell below trend growth for a while — a polite way of saying a recession — and then inflation fell,” said Samy Chaar, chief economist at Lombard Odier.

“The question is whether finance can go through that sequence. It feels like we’re reaching the limit, things are starting to break down, like what we’re seeing with the sterling.”

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Reporting by Lawrence Delevingne in Boston, Alun John in London and Tom Westbrook in Sydney; Additional reporting by Harry Robertson in London and Danilo Masoni in Milan; Edited by Toby Chopra, Marguerita Choy and Josie Kao

Our standards: The Thomson Reuters Trust Principles.

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