Written by Dara Ranasinghe
LONDON (Reuters) – Global stocks fell on Monday, as the risks of bigger interest rate hikes in the United States and Europe increased, further hurting bond markets and pushing the dollar to a 20-year high as recession fears mount.
Federal Reserve Chairman Jerome Powell, speaking at a Jackson Hole seminar on Friday, said the Fed will raise interest rates as high as needed to constrain growth, and keep them there “for some time” to cut inflation well beyond its 2% target.
European Central Bank Governing Council member Isabel Schnabel added to market concern. On Saturday, she warned that central banks risk losing public confidence and must act aggressively to rein in inflation, even if it pushes their economies into recession.
As investors woke up to the fact that interest rates would stay high for longer even as recession risks increased, two-year US Treasury yields rose to their highest levels since 2007. [US/]
European shares slumped to their lowest level in nearly six weeks and were last down 1%. US stock futures were deep in the red and Japanese blue chips fell more than 2.5%
London markets were closed for a holiday, while the MSCI global stock index fell 0.7% to its lowest level in one month.
“The message from Jackson Hole was loud and clear and not what the markets were expecting,” said Nordea chief analyst Jan von Geerich.
“Central banks need convincing evidence that inflation is declining. This is bad news for the economy and risk appetite and increases the risk of a deeper recession if we get a rapid rate hike.”
Investors have ramped up interest rate hike bets in the US and the eurozone, with a greater chance of pricing markets with a 75 basis point increase from the Federal Reserve and the European Central Bank in September.
Federal funds futures are priced up 73% chance that the Fed will raise 75 basis points and see rates peaking at 3.75% to 4.0%.
“Markets are focused on discussing the ‘coordinated tightening’ message from Jackson Hole as the ECB and Fed seem to have recommitted to creating price stability: yields are up and risk assets are a bit lower since last week,” Lars said. Senior Analyst at Danske Bank.
Much may depend on what the US August payroll numbers show on Friday. Analysts are looking for a moderate rise at 285,000 after July’s huge gain of 528,000.
As investors flock to raise interest rates, key measures of stock market volatility have risen.
Wall Street’s fear index, widely called, rose to its highest level since mid-July. The Euro STOXX volatility index, the European equivalent, jumped to a six-week high.
The violent chorus of central banks raised short-term yields globally, while inverting the Treasury curve further as investors priced in the eventual economic downturn. [US/]
US two-year yields rose to about 3.49%, the highest since late 2007 and well above the 10-year mark at 3.13%. Revenues also jumped across Europe. [GVD/EUR]
All of this benefited from the safe-haven dollar, which jumped to a two-decade high of 109.48 against a basket of major currencies.
The dollar hit a five-week high against the yen and was last up 0.75% at 138.66, as bulls look to retest its July high at 139.38.
Sterling fell to a 2-1/2-year low of $1.1649 as Goldman Sachs (NYSE) warned that the UK was heading for a recession. The euro was struggling at $0.9950, not far from a two-decade low of $0.99005.
“Energy security concerns will remain at the fore this week as Gazprom (MCX:) shuts down its main gas pipeline to Western Europe for three days from August 31 to September 2,” said Joseph Caporso, CBA’s Head of International Economics. Referring to supplies from the Russian gas giant Gazprom.
“There are concerns that the gas supply will not restart after the shutdown.”
Those concerns saw a 38% rise in Europe last week, adding to the severity of inflation.
The rise in the dollar and yields pressured gold, which fell 0.8% to $1,723 an ounce. [GOL/]
Oil prices swung higher on speculation that OPEC + may cut production at the meeting on September 5, and rose 29 cents to $101.28, while holding steady 49 cents to $93.50.
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