By Lawrence Delevingne
(Reuters) – Investors began another cycle of selling on Thursday as the dollar increased its stranglehold on currency markets, recession fears eroded stocks and bonds suffered more interest rate pain.
After a partial recovery on Wednesday, US stocks fell sharply on Thursday morning. It fell 580.6 points, or 1.96%, to 29,103.14 points. Loser 94.48 points, or 2.54%, to 3624.56 points. It fell 366.14 points, or 3.31%, to 10,685.50 points. [.N]
Europe’s morning was rough, too. The stock index fell 2.3%, as the euro and the pound sterling were affected over the past week by British debt fears, re-forming only partial ground, rising 0.1% and 0.7%, respectively. [.EU][/FRX]
China’s talk of currency intervention was also gaining traction while European government bond markets were preparing for the highest German inflation reading since the 1950s.
The stunning sale also resumed a day after the Bank of England intervened massively to try to calm the storm surrounding the UK government’s new spending plans. [GVD/EUR]
“The market won’t mind some stabilization, it’s getting a bit unpredictable,” said Agnes Pelech, chief European strategist at Barings Investment Institute.
She said investors were now seeing an “inconsistency” in the UK with government spending as the Bank of England tries to rein in inflation, while elsewhere the focus is on how much higher central banks are willing to deal with interest rates.
The yield on German 10-year government bonds, the benchmark for the eurozone, jumped to 2.29%, as figures from the state of North Rhine-Westphalia pointed to a double-digit inflation figure for the country as a whole.
The 10-year British bond yield, which drives UK borrowing costs, rose by about 12 basis points to 4.13% after falling by about 50 basis points the day before due to the surprise intervention by the Bank of England, even though the 30-year yield was targeted by the Bank of England. England. The central bank was little changed at 3.96%.
British Prime Minister Liz Truss has defended her new economic program that has pushed sterling to a record low this week and left UK borrowing costs close to that of Greece – saying it is designed to tackle the difficult situation Britain is now going through.
“We are facing difficult economic times,” Truss, who only took office this month, said on local BBC radio. “I’m not denying it. This is a global problem. But the absolutely correct thing is that the UK government has stepped in and acted.”
In retrospect, it was the dollar that crushed currencies almost everywhere this year, as well as the impact of the Russian invasion of Ukraine.
Speaking to reporters in London on Wednesday, veteran Fed policymaker Charles Evans offered no indication that any of the recent FX and bond market dramas would derail the US central bank’s interest rate hike path.
“We really need to get inflation under control,” Evans said, supporting an increase in Fed rates – now from 3% to 3.25% – to a range of 4.5% to 4.75% by the end of the year or March.
Yield rose 7.6 basis points to 3.784%; 30-year Treasuries rose 4.6 basis points to 3.727%.
Loretta Meester, president of the Federal Reserve Bank of Cleveland, reiterated this Thursday, saying she does not see distress in US financial markets that would change the Fed’s campaign.
Thursday’s currency moves, which measure the currency against other currencies, saw a hold around a 20-year high once again after having its worst session in 2-1/2 years on Wednesday. [/FRX]
“Despite the significant rally so far, we do not see much pressure on policy makers to respond to the strength of the dollar at this time,” Morgan Stanley (NYSE:) strategists wrote in a note released on Thursday.
“Trade-weighted dollar strength is not excessive, coinciding with tighter financial conditions and in line with the Fed’s goals, although the inflation benefits are small.”
Overnight, it fell again as well, although it remained far from its recent post-financial crisis lows, with China’s central bank saying stabilizing the foreign exchange market was its top priority and due to reports of possible intervention in the currency market as well. . [CNY/]
MSCI’s broadest index of Asia Pacific shares outside Japan ended the day nearly flat, although it managed to post a gain of nearly 1%. ()
The weekly jobless claims data missed expectations with an unexpected drop showing just how tight the US labor market is. The government said in its third estimate of GDP that US gross domestic product declined at an unrevised annual rate of 0.6% in the last quarter. The economy contracted at a rate of 1.6% in the first quarter.
Recession worries combined with supply issues and a strong dollar sent oil prices oscillating after rising more than $3 in the previous session. [O/R]
Goldman Sachs (NYSE:) lowered its oil price forecast for 2023 this week, citing expectations of weak demand and a stronger US dollar, but said global supply problems reinforced his long-term view that prices could rise again.
Oil prices fell again on Thursday, dragged down by a stronger dollar and a weak economic outlook, even as OPEC+ began discussions about cutting oil production.
It fell 0.9% to $81.41 a barrel and was at $88.62, down 0.78% on the day.
A strong dollar also helped push gold prices lower on Thursday, with higher interest rates looming as well. It fell 0.7% to $1,648.19 an ounce. And the United States fell 0.91 percent to $ 1645.20 an ounce.