Stocks hit a two-year low as central banks step up their war on inflation

Stocks hit a two-year low as central banks step up their war on inflation

Written by Tom Westbrook and Amanda Cooper

LONDON/SYDNEY (Reuters) – Stocks hit two-year lows on Friday and bonds suffered an eighth weekly loss as investors digested the prospect of a sharper rise in US interest rates, while currency markets remained volatile after Japan intervened to support them. yen.

Interest rates rose sharply this week in the US, Britain, Sweden, Switzerland and Norway – among other places – but it was the Federal Reserve’s signal that it expects US interest rates to continue into 2023, triggering the recent sell-off.

The MSCI global stock index fell to its lowest level since mid-2020 on Friday, after losing about 12% in the month or so since Federal Reserve Chairman Jerome Powell made clear that lowering inflation would hurt.

The euro fell for the fourth day in a row after data showed that the slowdown in the German economy worsened in September, as consumers and businesses faced an unprecedented energy crisis and spiraling inflation.

European shares fell for a second day, pressured by losses in everything from banking stocks to natural resources and technology stocks. ()

The pan-region index was down about 0.5% in early trading, while the Frankfurt index lost 0.6%, making it one of the worst-performing indices in Europe. London lost 0.1%, on the back of the pound falling to a 37-year low.

β€œAlmost anything besides inflation data and central bank policy decisions is just noise at the moment, with the market focusing firmly and almost unilaterally on how high rates are going across developed markets, and for how long they will stay at those peaks,” said Michael Brown, chief strategist at CaxtonFX.

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β€œThe Fed’s message on Wednesday was clear, that interest rates are higher than market rates, and policy will remain constrained for a long time to come, most likely throughout 2023 β€” in that environment, it is almost impossible to be long-term stocks, or want Buying Treasuries, so the sell-off in both is not a surprise, and should continue.

S&P futures fell 0.3%, indicating a weaker start on Wall Street later.

With US interest rates poised to rise faster and stay high for longer, the dollar hit a two-decade high this week, while benchmark 10-year US Treasury yields surged as investors dumped inflation-sensitive assets like bonds.

The 10-year yield was trading 2 basis points lower today at 3.68%, but it is up about a quarter of a percentage point this week alone and is on track for its eighth consecutive weekly increase.

β€œThe ten-year period has been catching up with the newly calibrated liquidity ratio,” said Damian McCullough, head of interest rate strategy at Westpac, in Sydney.

β€œIf you think the front end is going to peak at 4.60%, can you really keep the 10-year bond yields at 3.70%?” He said.

“It’s a very volatile price movement…I think this volatility continues across all markets in the near term (until) the price market stabilizes.”

The euro and the yen fell to 20-year lows on Thursday, until Japanese authorities intervened in the market for the first time since 1998 to buy the yen and halt its long decline.

The yen last settled at 142.29 per dollar and is on track to reach its best week in over a month, but few believe this strength will continue.

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Meanwhile, two-year gold bond yields are headed for their worst week in 13 years after the Bank of England raised interest rates less than some currency traders had hoped.

Later on Friday, new Finance Minister Kwasi Koarting will announce a potentially inflationary fiscal plan and more bad news for gold.

Gold, which pays no interest, has been under pressure, especially over the course of the quarter, as yields have soared. It was last down 0.1% on the day at around $1,667 an ounce, its weakest in two years.

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