Stocks dropped with US Treasuries after hawkish signaling from the Federal Reserve bolstered speculation the US central bank will keep raising interest rates to counter inflation.
(Bloomberg) — Stocks dropped with US Treasuries after hawkish signaling from the Federal Reserve bolstered speculation the US central bank will keep raising interest rates to counter inflation.
UK fast-fashion retailer Boohoo Group Plc was among the sharpest decliners in Europe, plunging 10% after lowering its forecasts as it cuts prices to attract struggling shoppers. The region’s Stoxx 600 index retreated 0.2 to a fresh six-month low. US equity futures steadied.
Hong Kong shares led declines in Asia, with the Hang Seng Index dropping as much as 3.4%, as trading resumed after a long weekend. The MSCI Asia Pacific Index has now fallen almost 10% from its July peak, closing in on a correction. China remains in a week-long holiday.
Weakness in bond markets followed a slump in Treasuries Monday when hawkish Fed messaging overtook earlier optimism about the deal to avoid a US government shutdown. Yields on five- to 30-year Treasuries all jumped about 10 basis points, while those on the 10-year note climbed to the highest since 2007.
“While market conditions remain volatile for both equities and fixed income, we believe there are various ways investors can navigate through,” said Mark Haefele, chief investment officer at UBS Global Wealth Management. “In addition, we are at a rare moment when in our base case we expect cash, bonds, stocks, and alternatives to all deliver reasonable returns. That is both over the next six to 12 months, and over the longer term.”
The dollar strengthened against most of its Group-of-10 peers with Bloomberg’s dollar index edging higher. The US currency touched a year-to-date high versus the yen after the Bank of Japan said Monday it would conduct an additional buying operation. Japan’s 10-year yields slipped two basis points.
Australia’s dollar slipped to the lowest level since November as bearish sentiment and elevated Treasury yields dragged down the risk currency after the central bank kept policy unchanged for a fourth meeting.
Selloff Momentum
The selloff in global bonds gathered momentum as the US shutdown reprieve prompted traders to raise bets on a November rate interest-hike from the Fed to a roughly one-in-three chance, up from the 25% likelihood priced on Friday.
Fed Vice Chair for Supervision Michael Barr said Monday the biggest question before central bankers was how long to leave rates elevated, while known FOMC hawk Michelle Bowman reiterated her call for multiple hikes. Cleveland Fed President Loretta Mester, who doesn’t vote on monetary policy this year, said the central bank will likely need to raise rates once more this year.
Investors now have to reprice their expectations, which inherently means more volatility, according to Kyle Rodda, senior market analyst at Capital.com. “There’s concern about the second-order impacts of stronger growth and higher rates,” he said. “Does inflation re-accelerate? Does the subsequent rise in yields ‘break’ something?”
Elsewhere, gold slipped to the lowest since March. Oil fell for a fourth day, with West Texas Intermediate dropping below $90 a barrel. Waning demand from China is poised to to cap the gains from OPEC+ supply cuts, Citigroup Inc. analyst Ed Morse said.
China Evergrande Group defied the broader gloom, jumping as much as 42% as it restarted trading after a halt last week.
Key events this week:
- China has week-long holiday
- Atlanta Fed President Raphael Bostic speaks on economic outlook and inflation, Tuesday
- US August JOLTS report, Tuesday
- New Zealand rate decision, Wednesday
- Eurozone services and composite PMIs, Wednesday
- ECB President Christine Lagarde gives welcome address at conference, Wednesday
- US ISM services index, Wednesday
- France industrial production, Thursday
- BOE Deputy Governor Ben Broadbent, Riksbank First Deputy Governor Anna Breman participate at panel discussion, Thursday
- US trade, initial jobless claims, Thursday
- San Francisco Fed President Mary Daly speaks at the Economic Club of New York, Thursday
- Germany factory orders, Friday
- US unemployment rate, nonfarm payrolls, Friday
Some of the main moves in markets:
Stocks
- The Stoxx Europe 600 fell 0.2% as of 8:10 a.m. London time
- S&P 500 futures were little changed
- Nasdaq 100 futures were little changed
- Futures on the Dow Jones Industrial Average were little changed
- The MSCI Asia Pacific Index fell 1.5%
- The MSCI Emerging Markets Index fell 1.1%
Currencies
- The Bloomberg Dollar Spot Index rose 0.1%
- The euro was little changed at $1.0475
- The Japanese yen rose 0.1% to 149.71 per dollar
- The offshore yuan was little changed at 7.3219 per dollar
- The British pound was little changed at $1.2078
Cryptocurrencies
- Bitcoin fell 0.8% to $27,616.5
- Ether was little changed at $1,667.35
Bonds
- The yield on 10-year Treasuries advanced one basis point to 4.69%
- Germany’s 10-year yield declined one basis point to 2.91%
- Britain’s 10-year yield declined two basis points to 4.55%
Commodities
- Brent crude fell 0.4% to $90.36 a barrel
- Spot gold fell 0.3% to $1,821.74 an ounce
This story was produced with the assistance of Bloomberg Automation.
–With assistance from Jason Scott and Sagarika Jaisinghani.
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