Stocks tumble, dollar soars and bonds plunge as recession fears grow

  • Dow ready to confirm its bear market
  • MSCI All-World Index at 2-year low
  • The dollar hits a new high in two decades
  • Pound, gilts sell off after UK ‘mini-budget’

NEW YORK/LONDON, Sept 23 (Reuters) – 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 to raise interest rates to control inflation economies in recession.

The Dow Jones (.DJI) was poised to confirm a bear market as an increasingly sharp slowdown in business activity in the Eurozone, and shrinking business activity in the United States for a third consecutive month in September, left Wall Street wallowing in a sea of ​​red.

UK assets weakened further after the UK government announced huge debt-funded tax cuts that will spur borrowing, pushing UK bond yields to 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 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 (.MIWD00000PUS) fell 2.28% to near two-year lows. 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 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 projection of the Fed of the federal funds rate at 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 1.51% to $0.9687 after data showed the slowdown in Germany’s economy worsened in September. The dollar index rose 1.609%.

The Japanese yen weakened 0.64% to 143.28 to the dollar, but was still poised 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 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 3.48% to $1.0865 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.”

Cost of insuring UK debt against default soars

The dollar hit its highest level in two decades and extended its double-digit gains for the year against several currencies.

King dollar reigns supreme

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.

The yield on 10-year Treasury bills fell 2.5 basis points to 3.683%.

A closely watched part of the US Treasury yield curve measuring the spread between two- and 10-year Treasury yields, seen as a harbinger of a recession in a year or two, was at – 51.4 basis points.

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 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

Our standards: The Thomson Reuters Trust Principles.


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