LONDON/SYDNEY, Sept 28 (Reuters) – Global stocks fell to a two-year low on Wednesday, weighed down by rising borrowing costs that fueled fears of a global recession and sent investors into the arms of the safe-haven dollar.
US 10-year Treasury yields topped 4.0% for the first time since 2010 as markets bet that the Federal Reserve may have to hike rates above 4.5% in its crusade against inflation .
The pound came under fire again as UK bond yields rose again, which pushed government borrowing costs above those with heavier debt burdens such as Greece or Italy.
Sign up now for FREE unlimited access to Reuters.com
The International Monetary Fund (IMF) and the rating agency Moody’s have criticized Great Britain’s new economic strategy. Investors braced for more devastation in bond markets, which has already forced the Bank of England to promise “significant” action. Continue reading
Central banks around the world have been raising interest rates over the past week, saying they will do whatever they can to fight sweltering inflation, especially as the northern hemisphere winter threatens to exacerbate a global energy crisis.
“It is now clear that central banks in advanced economies will make the current tightening cycle the most aggressive in three decades,” said Jennifer McKeown, head of global economics at Capital Economics.
“While this may be necessary to tame inflation, there will be significant economic costs.
“In short, we think next year will look like, feel like, and maybe even croak like a global recession, so let’s call it that for now.”
The MSCI All-World Index slipped 0.65%, its lowest level since November 2020. It is heading for a 9% decline in September – expected to be the largest monthly decline since March 2020’s 13% drop.
In Europe, the STOXX 600 (.STOXX) was down 1.2% in early trade, led by declines in industrials like steelmaker ThyssenKrupp (TKAG.DE) and aluminum maker Norsk Hydro (NHY.OL).
Across the region of the export-sensitive DAX <.GDAXI > fell 1.7% to its lowest level since the end of 2020, while the FTSE 100 (.FTSE) fell nearly 2% in line with other struggling UK assets.
S&P 500 futures fell 0.9%, while Nasdaq futures lost 1.2%. If the benchmark falls later on open, it will mark the S&P 500’s seventh day of losses.
European government bonds came under renewed pressure as the region’s energy crisis deepened following a series of incidents that leaked the Nord Stream pipeline.
The 10-year German government bond yield rose 5 basis points (bps) to 2.3% after hitting a near 11-year high of 2.309%.
“European government bond yields have risen to multi-year highs amid concerns over UK politics and a rightward shift in Italian politics amid still elevated inflation,” analysts at JPMorgan wrote in a statement.
“Italian 10-year spread to German Bund has eclipsed 250bp, well above the 200bp mark which we think is uncomfortable for the ECB.”
Investor confidence has been shaken by the fall in sterling and UK bond prices, which could force some fund managers to sell other assets to offset losses.
The Bank of England’s chief economist underscored the risk of even higher interest rates, saying the tax cuts are likely to require a “significant policy response”.
Moody’s told the UK government on Tuesday that large, unfunded tax cuts are “credit negative” and could undermine the government’s fiscal credibility. Continue reading
MORE RISK PREMIUM, PLEASE
At the heart of this latest sell-off was the UK government’s so-called “mini-budget” last week, which announced a series of tax cuts and offered little detail on how they were to be funded.
Gilt prices have plummeted and the pound has hit record lows as a result.
George Saravelos, global head of FX strategy at Deutsche Bank Research, said investors now wanted more to fund the country’s deficits, including a 200 basis point rate hike by November and a final rate hike to 6%.
“This is the level of risk premium that the market is now asking for to stabilize the currency,” Saravelos said. “Failing to do that risks further currency weakness, more imported inflation and further tightening, a vicious circle.”
Sterling fell 0.5% to $1.0685, still above Monday’s record low of $1.0327 and facing its biggest monthly decline since the Brexit vote in June 2016.
The safe-haven dollar was a big beneficiary of sterling weakness, rallying to a fresh 20-year high of 114.680 against a basket of currencies.
The euro fell for the sixth straight day, falling 0.35% to $0.9560, just below last week’s 20-year low of $0.9528.
The dollar also hit a record high for the offshore-traded Chinese yuan at 7.2387 after rising eight straight sessions.
In turn, increasing pressure on emerging market currencies from the strengthening dollar increases the risk that these countries will have to raise interest rates further and undermine growth.
The surge in the dollar and bond yields also weighed on gold, which oscillated at $1,624 an ounce after hitting lows not seen since April 2020.
Oil prices fell again as demand concerns and a strong dollar offset support from US production cuts caused by Hurricane Ian.
Brent fell 2% to $84.45 a barrel, while US crude fell 2.4% to $76.61 a barrel.
Sign up now for FREE unlimited access to Reuters.com
Reporting by Wayne Cole; Edited by Shri Navaratnam, Kim Coghill and Angus MacSwan
Our standards: The Thomson Reuters Trust Principles.
#Stocks #hit #twoyear #lows #sterling #fire
