by Wayne Cole
SYDNEY (Reuters) – Asian stock markets fell on Wednesday as rising borrowing costs intensified fears of a global recession, scaring investors into the arms of the safe-haven dollar and punishing currencies across the region.
US 10-year Treasury yields rose above 4.0% for the first time since 2010 as markets bet the Federal Reserve may have to take rates above 4.5% in its anti-inflation crusade.
Sterling also came under renewed pressure as Moody’s (NYSE) warned that unfunded UK tax cuts would be “negative” for the country’s credit standing, deepening the damaging sell-off in gold bonds.
“It is now clear that central banks in advanced economies will make the current tightening cycle the most stringent in three decades,” said Jennifer McKeown, head of global economics at Capital Economics.
โWhile this may be necessary to tame inflation, it will have a significant economic cost.
“In short, we think next year is going to look like a global recession, feel like a global recession, maybe even a charlatan, so that’s what we’re calling it now.”
Higher growth and slower growth is not a good combination for stocks, and the broadest MSCI Asia Pacific Index outside Japan fell 2.0% to its lowest level since April 2020.
It fell 2.2% and South Korean shares fell 3.0% to their lowest level in two years. Chinese blue chips lost 0.7%.
It got stuck in a bearish mood and fell 0.8%, while Nasdaq futures were down 1.0%. This will be the seventh session of losses and threaten the technically important 200-week average at 3,590.
Futures on the EUROSTOXX 50 were down 1.0%, while futures lost 1.1% as European borrowing costs exploded.
“European sovereign bond yields surged to multi-year highs amid concerns about UK policymaking and a rightward shift in Italian politics amid high inflation,” analysts at JPMorgan (NYSE:) wrote in a note.
โThe Italian 10-year yield to the German Bund is over 250 basis points, which is well above the 200 basis points we think makes the ECB uncomfortable.โ
Investors’ confidence was shaken by the collapse of the British pound and British bond prices, which could force some fund managers to sell other assets to cover the resulting losses.
Emphasizing the risks of higher interest rates, the Bank of England’s chief economist said tax cuts would likely require an “important policy response”.
Moody’s on Tuesday warned the UK government that large unfunded tax cuts were “credit negative” and could undermine the government’s fiscal credibility.
MORE RISK PREMIUM, PLEASE
George Saravelos, Global Head of FX Strategy at German Bank (ETR ๐ Research, said investors now want more to fund the country’s deficit, including a 200 basis point rate hike by November and a 6% rate hike.
โThis is the level of risk premium that the market is now asking for to stabilize the currency,โ Saravelos said. “If this is not delivered, it risks more currency weakness, more imported inflation, more tightening, a vicious cycle.”
Sterling came under fire again at $1.0644, halting its bounce off Monday’s low of $1.0327 and off the $1.1300 level it was in before last week’s UK budget.
UK 10-year bond yields rose 119 basis points in just four sessions to 4.50%, the largest such move since at least 1979. [GBP/]
The safe-haven dollar was the main beneficiary of the collapse in sterling, which rose to a 20-year high of 114,680 against a basket of currencies.
The dollar settled at 144.75 yen, testing the Japanese authorities’ determination to protect the 145.00 level after last week’s intervention.
The Euro fell back to $0.9552 and returned to a two-decade low of $0.9528.
The dollar also touched a record high in offshore trading at 7.2387, after rising for eight consecutive sessions.
The increased pressure on emerging market currencies from the dollar’s appreciation in turn adds to the risks that these countries will have to continue to raise interest rates and undermine growth.
A rally in the dollar and bond yields was also a drag on gold, which was hovering at $1,624 an ounce after hitting its lowest levels since April 2020. [GOL/]
Oil prices fell again as demand concerns and a stronger dollar offset support from US production cuts caused by Hurricane Ian. [O/R]
It fell $1.17 to $85.03 a barrel, while it lost 1.10 cents to $77.40 a barrel.
