London, September 23 (BNA) Stocks hit a two-year low on Friday, the dollar rose to a two-decade high and bonds sold again as investors fear bigger increases in interest rates are on their way to curb inflation, while assets tumbled. British. After announcing huge debt-funded tax cuts.
British assets were already weaker but extended their decline after the new British finance minister unveiled a historic tax cut agenda that will see government borrowing increase. UK bond yields are set for their biggest daily rise in decades, and money markets have been setting Bank of England interest rates as high as 5% by May next year. Reuters reported that sterling lost 2%.
The mood in the markets has been tense all week, with major central banks offering another 350 basis points to raise interest rates to fight inflation, Japan intervening to prop up the yen and bleak PMI data on Friday pointing to a growing slowdown in major economies.
Interest rates were hiked in the US, Britain, Sweden, Switzerland and Norway – among other places – but it was the Fed’s signal that it expected high US interest rates to continue until 2023 that led to the recent sell-off.
The MSCI global stock index (.MIWD00000PUS) 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 to natural resources and technology stocks.
The pan-region STOXX 600 (.STOXX) is down 2.2%, while Frankfurt’s DAX (.GDAXI) loses 1.94%, making it one of the worst-performing indices in Europe.
“Almost 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 Caxton FX.
S&P emini futures are down 1.15%, indicating a weaker start on Wall Street later.
London’s FTSE (.FTSE) lost 1.9%, on the back of the pound dropping 2% to another 37-year low and a weak $1.1022 at some point.
“Low fiscal policy and tighter monetary policy are usually a positive mix for a currency — if it can be funded with confidence,” said Chris Turner, head of global markets at ING.
“Here’s the problem – investors have doubts about the UK’s ability to fund this package, hence the poor performance of gold.”
With US interest rates poised to rise faster and stay high for longer, the dollar hit a two-decade high, while yields on benchmark 10-year US Treasuries surged as investors dumped inflation-sensitive assets like bonds.
The 10-year yield rose 5 basis points to 3.776%, another 11-1/2 year high and on track for its eighth consecutive weekly increase.
Eurozone bond yields also rose sharply, with Italian 10-year bonds hitting 4.294%, the highest since late 2013, ahead of Sunday’s Italian elections.
The euro hit a 20-year low, dropping $0.9736.
The Japanese yen fell so sharply on Thursday that the Japanese authorities intervened to buy the currency for the first time since 1998 and halted its long decline.
On Friday, the yen gave up some of its gains, with the dollar gaining 0.4 percent to 142.97 yen to the dollar. Few believe that the yen’s rally will continue given the extent of the BoJ’s pessimism.
Gold, which pays no interest, has been under pressure, especially over the course of the quarter, as yields have soared. It was last down 1.55% on the day around $1,644 an ounce, its weakest in two years.
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