- European stocks fall as mood risk evaporates
- Oil prices drop more than 4% ahead of US cap change
- Bond Yields Fall But Eurozone Spreads Widen
- Dollar Bulls Send Yen to 24-Year Low
- Chart: Overall Asset Performance
LONDON, June 22 (Reuters) – Global stock markets and oil prices skidded on Wednesday as lingering throbs over rising interest rates and recessions hit again, while the Japanese yen hit a new high. lowest in 24 years against a seemingly unstoppable US dollar.
The enthusiasm that gave Wall Street its best day in more than a month on Tuesday suddenly dissipated as Europe opened 1.5% lower and Brent prices plunged 4% after what had also been a bearish Asian session.
The fiery dollar bulls were also taking no prisoners on bets that Federal Reserve chief Jay Powell would reiterate in Washington later the need to raise U.S. rates sharply and quickly.
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As well as compounding the yen’s woes, it sent the euro down 0.3%, the oil-sensitive Norwegian krone down 1.3% and the British pound down 0.7%, the data confirming that inflation is now at its highest level in 40 years of 9.1%. Read more
“It’s remarkable how quickly the market has turned around after yesterday’s small dip in sentiment,” said Saxo Bank FX strategist John Hardy.
“The commodity market seems to be calling for a (global) recession,” he added. “And the dollar is strengthening as a safe haven.”
These recession-related concerns also played out in bond markets, where yields on US and German government bonds fell as traders sought traditional safe havens.
The yield on the benchmark 10-year US Treasuries fell to 3.233% while Germany’s 10-year yield fell 7 basis points (bps) to 1.692%, after hitting its highest level since January 2014 to 1.928% last week.
But the gaps between Germany and heavily indebted Italy widened again. His foreign minister, Luigi Di Maio, has said he is quitting the 5 Star Movement to form a new parliamentary group supporting the government, a move that threatens to bring further instability to Prime Minister Mario Draghi’s coalition. Read more
Overnight, MSCI’s broadest index of Asia-Pacific stocks outside Japan (.MIAPJ0000PUS) fell 2.3% to near a five-week low. Hong Kong-listed heavy tech companies plunged more than 4% (.HSTECH) although Tokyo’s Nikkei (.N225) managed to hold its losses to just 0.4%.
Investors continue to assess how worried they must be that central banks could push the global economy into recession as they try to rein in smoldering inflation by raising interest rates.
Major U.S. equity benchmarks rose 2% overnight on the possibility that the economic outlook might not be as gloomy as expected in trade last week when the S&P 500 (.SPX) recorded its strongest weekly percentage decline since March 2020.
But the improvement in Wall Street sentiment didn’t look likely to last either with S&P 500 and Nasdaq futures both down nearly 1% on Wednesday.
“I think this recent post-holiday bear market rally is a reflection of investor uncertainty over whether or not we’ve seen the spike in inflation and the ferocity of the Fed – I think we’re close.” , said Invesco’s global market strategist for Asia-Pacific David Chao.
U.S. Federal Reserve Chairman Jerome Powell is due to begin testimony before Congress on Wednesday with investors looking for further clues about whether another 75 basis point rate hike is expected in July.
Economists polled by Reuters expect the Fed to hike interest rates by 75 basis points next month, followed by a half-percentage point hike in September, and not back not to quarter-point moves until November at the earliest. Read more
Most other global central banks are in a similar situation, with the exception of the Bank of Japan, which last week pledged to maintain its ultra-low interest rate policy. In contrast, the Czech central bank was expected to raise rates by 125 basis points later, with inflation in double digits.
This gap between low interest rates in Japan and rising US rates weighed on the yen, which hit a new 24-year low of 136.71 to the dollar in Asian trading, before firming to 136.20.
Minutes of the Bank of Japan’s April policy meeting released on Wednesday showed the central bank’s concerns about the impact the falling currency could have on the country’s business environment. Read more
The other big move was in the commodity markets. The 4% plunge in oil prices came amid recession concerns and US President Joe Biden is expected to call on Wednesday for a temporary suspension of the 18.4 cents per gallon federal gasoline tax, said a source briefed on the plan told Reuters.
Brent fell $5 to $109.79 a barrel, while U.S. crude fell 5.9% or $5.37 to $104.15.
“The latest in a long line of attempts to temper soaring prices at the pumps is having the desired effect. Yet there is no guarantee that this knee-jerk reaction will stand the test of time,” he said. said Stephen Brennock of PVM, pointing to an expected increase in summer demand.
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Additional reporting by Sam Byford in Tokyo and Shadia Nasralla in Bangalore
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