Stocks are collapsing, the dollar is rising, and bonds are falling, as fears of a recession grow

  • Dow is preparing to confirm a bear market
  • MSCI All-World hits two-year low
  • The dollar reaches its highest level in two decades
  • Selling sterling and gold after a ‘mini-budget’ in the UK

NEW YORK/LONDON (Reuters) – US and European stocks fell on Friday, the dollar surged to a 22-year high and bonds were sold again as concerns grew that the central bank’s rate hike to tame inflation would drag major currencies. Economies are in recession.

The Dow Jones (.DJI) narrowly failed to confirm a bear market as the slowdown in business activity deepened across the eurozone, and business activity in the US contracted for a third straight month in September, leaving Wall Street plunging into a sea of ​​red. .

The British currency and debt prices fell further after the UK government announced massive debt-funded tax cuts that will boost borrowing, sending UK bond yields soaring in their biggest daily increases in decades. Read more

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The euro fell to a 20-year low and the pound to a 37-year low, while the dollar rose after the Federal Reserve indicated this week that rates will be higher for a longer period.

George Goncalves, head of US macroeconomic strategy at MUFG, said the Fed wants to tighten financial conditions and that higher interest rates are the mechanism to deliver a market that investors haven’t seen for a long time.

“It’s something we’re not used to, which is why it’s more surprising to most people,” he said. “It will be a long competition 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) fell 2.07% to its lowest level in nearly two years. The European Stoxx 600 Index (.STOXX) closed down 2.34%, posting its biggest weekly loss in three months.

On Wall Street, the Dow Jones Industrial Average (.DJI) fell 1.62%, the first major index of US stocks to drop below its June low on a daily basis. But the blue-chip index avoided confirming a bear market, missing a close 20% or more below its record high, according to a widely used definition.

The S&P 500 (.SPX) and Nasdaq Composite (.IXIC), already in bear market territory, fell 1.72% and 1.85, respectively.

Britain, Sweden, Switzerland, Norway and other countries also raised interest rates this week. But the Fed’s indication that it expects US interest rates to continue to rise through 2023 ignited the crash in the stock and bond markets.

Andrzej Skiba, head of the US BlueBay fixed income team at RBC Global Asset Management, said investors are trying to control inflation and how high rates are.

“There is concern in the market about confidence that we know how inflation will develop and that yields will actually peak in the mid-40s,” he said, referring to the Federal Reserve’s forecast for the federal funds rate at 4.6% in late 2023.

“People have been thinking about this uncertainty and it could mean more tightening going forward, it could mean more tight financial conditions that the markets have to go through.”

The euro fell for the fourth day in a row, dropping 1.49% to $0.9689 after data showed the German economy worsened in September. The dollar index rose 1.6 percent.

The Japanese yen slipped 0.68% to 143.34 per dollar, but failed to post its first weekly gain in more than a month. On Thursday, Japanese authorities stepped in to prop up the currency for the first time since 1998.

British bond prices are in a deep plunge, with UK five-year Treasury yields jumping 51.4 basis points to 4.052%, the biggest one-day rise since at least late 1991, according to Refinitiv data, after the government unveiled the tax cuts. The price of a bond moves against its yield.

Sterling fell 3.49% to $1.0864, ​​its biggest one-day decline since March 2020, when the COVID-19 pandemic rocked the markets. The pound was already under pressure before the tax cut was announced, down 11% since the start of July.

“Low fiscal policy and tighter monetary policy are usually a positive mix for a currency — if they can be funded with confidence,” said Chris Turner, head of global markets at ING.

“Here’s the problem – investors are skeptical about the UK’s ability to fund this package, hence the amazing underperformance.”

The cost of insuring UK debt against default is rising

The dollar hit a two-decade high and continued its gains during the year against several currencies.

Dollar King reigns

The benchmark 10-year US Treasury yields rose as investors dumped inflation-sensitive assets. BofA Global Research said in a note that global government bond losses are on track for the worst year since 1949.

The 10-year Treasury Inflation Protected (TIPS) yield, which represents expected inflation and known as real yields, was 1.426%, the highest since February 2011.

The yield curve inversion between two-year and 10-year notes hit minus 58 basis points on Thursday, the most inverted in at least two decades, and was last at minus 51.6 basis points, signaling fears of a looming recession.

Eurozone bond yields also rose sharply, with Italian 10-year bonds hitting 4.294%, the highest since late 2013, ahead of Sunday’s Italian elections.

Oil prices fell about 5% to their lowest level in eight months. The super-strong dollar made Crude Oil price in other currencies and recession fears affected the demand outlook.

Brent crude futures closed 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 levels since April 2020 as a stronger dollar and higher Treasury yields hit non-interest bullion.

US gold futures settled down 1.5% at $1,655.60.

Bitcoin fell 2.57% to $18,904.00.

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Additional reporting by Tom Westbrook in Sydney and Joyce Alves in London.

Our Standards: Thomson Reuters Trust Principles.

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