The global exodus from stocks and bonds is intensifying as investors grow increasingly concerned that inflation will force central banks to squash economic growth with higher interest rates.
S&P 500 futures sank 1.9%, signaling a fresh 15-month low for the US benchmark index after Friday’s shock consumer prices report ignited a more than $1 trillion selloff. Asian equities sank 2.7%, while the yen weakened to a 24-year low and Japan’s 10-year government bond yield breached the central bank’s ceiling for the first time since 2016.
Treasury yields rose across the curve, led by shorter maturities, with the two-year rising as much as 12 basis points to the highest level since late 2007. Yields on 30-year Treasuries are below those on five-year notes, pointing to fears that sharp Federal Reserve interest-rate hikes will spark a hard economic landing.
With little news over the weekend to change that narrative, selling momentum was especially strong in US assets. Markets are also contending with Covid outbreaks in China, where Beijing and Shanghai resumed mass virus testing. The fear is that the country’s Covid-zero strategy will lead to repeated lockdowns that damage both its economy and global supply chains. The yuan slumped. Oil and iron ore paced declines among growth-sensitive commodities.
The dollar was stronger on haven demand amid the toxic mix of rising costs and slower growth. Risk-sensitive currencies like the Australian dollar weakened.
The poor sentiment was also evident in a cryptocurrency slide that took Bitcoin below $25,000 to the lowest in 18 months.
“At some point, financial conditions will tighten enough and/or growth will weaken enough such that the Fed can pause from hiking,” Goldman Sachs Group Inc. strategists including Zach Pandl wrote in a note. “But we still seem far from that point, which suggests upside risks to bond yields, ongoing pressure on risky assets, and likely broad US dollar strength for now.”
The US consumer price index rose 8.6% in May from a year earlier — a fresh 40-year high — in a broad-based advance, adding to a slate of troubling inflation data globally. Many investors expect half-point Fed rate hikes this week and again in July and September. Barclays Plc and Jefferies LLC said an even bigger 75-basis-point move is possible at the June meeting.
No Smooth Ride
The volatility in Treasuries “can’t be anything that any central bank would welcome,” Sonal Desai, Franklin Templeton’s fixed income chief investment officer, said on Bloomberg Television. “We’re going to see more of the same. It’s not going to be a nice, smooth grind upwards. The Fed is going to need to do more.”
The yen’s slide against the greenback reflects the stark policy contrast between a hawkish Fed and a still dovish Bank of Japan. Bank of Japan Governor Haruhiko Kuroda said a recent rapid weakening of the yen was undesirable and negative for the economy in his first public comments since the currency reached the lowest level in 24 years.
Still, the Japanese currency will “come under renewed selling pressure” if the BOJ doesn’t change its easy policy, Rob Carnell, chief economist and head of Asia-Pacific research at ING Groep NV in Singapore, said on Bloomberg Television on Monday. “I think it’s a question of when rather than if with them, exactly what kind of nuance they put into play with the yield curve control.”
What to watch this week:
- First WTO ministerial meeting in nearly five years. Through June 15.
- ECB’s Luis De Guindos is due to speak, Monday.
- US PPI, Tuesday.
- China key economic activity data, liquidity operations, medium-term lending facility, Wednesday.
- FOMC rate decision, Chair Jerome Powell briefing, US business inventories, empire manufacturing, retail sales, Wednesday.
- ECB President Christine Lagarde is due to speak, Wednesday.
- Bank of England rate decision, Thursday.
- US housing starts, initial jobless claims, Thursday.
- Bank of Japan policy decision, Friday.
- Eurozone CPI, Friday.
- US Conference Board leading index, industrial production, Friday
Some of the main moves in markets:
Stocks
- S&P 500 futures fell 1.9% as of 3:08 p.m. in Tokyo. The S&P 500 fell 2.9%
- Nasdaq 100 futures fell 2.3%. The Nasdaq 100 dropped 3.6%
- Japan’s Topix index is down 2.2%
- South Korea’s Kospi index shed 3.7%
- Hong Kong’s Hang Seng index fell 3.4%
- Hong Kong’s Hang Seng tech index declined 4.5%
- China’s Shanghai Composite index dropped 1.6%
Currencies
- The Bloomberg Dollar Spot Index rose 0.4%
- The euro was at $1.0479, down 0.4%
- The Japanese yen weakened to 134.86
- The offshore yuan was at 6.7585 per dollar, down 0.4%
Bonds
- The yield on 10-year Treasuries rose one basis point to 3.17%
Commodities
- West Texas Intermediate crude fell 1.8% to $118.54 per barrel
- Gold fell 0.4% to $1,864.51 an ounce
Source By: Bloomberg