Investors fled into the safety of bonds while stocks fell, as a lurch toward higher interest rates together with weak euro-area activity data heightened anxiety that aggressive central bank policy will tip economies into recession.
(Bloomberg) — Investors fled into the safety of bonds while stocks fell, as a lurch toward higher interest rates together with weak euro-area activity data heightened anxiety that aggressive central bank policy will tip economies into recession.
The technology-heavy Nasdaq 100 and the small-cap Russell 2000 indexes both dropped more than 1%. Chipmakers including Marvell Technology Inc. and GlobalFoundries Inc. slumped. Global stocks headed for their biggest weekly decline in more than three months. European shares slipped with defensive sectors such as health care gaining.
The second-quarter stock rally is fraying under the threat of more rate hikes and fears that the full economic impact of aggressive central bank policy has yet to be felt. Federal Reserve Chair Jerome Powell said the US may need one or two more rate increases in 2023. “Getting inflation down is Job One, inflation is too high,” Atlanta Fed President Raphael Bostic said at an event Friday.
Treasury Secretary Janet Yellen sought to temper concerns over a US recession, she acknowledged the risk and said a consumer-spending slowdown was needed.
“The market is too confident that the Federal Reserve can engineer a soft landing,” said Ryan Belanger, founder and managing principal at Claro Advisors. “We believe it is wise for investors to take profits in stocks thanks to this year’s rally and consider reinvesting those proceeds into high quality bonds.”
A rally in European bonds sent five-year German yields plummeting as much as 16 basis points to 2.48%, putting them on course for the biggest drop since April. US Treasuries yields fell in sympathy, with the 10-year benchmark note shedding nearly 10 basis points.
Scott Ladner, chief investment officer at Horizon Investments, said the bonds rally is being driven by “growth fears with European flash PMIs coming in soft this morning,” adding that there’s a bit of “breath-taking after the last few weeks of very strong risk asset performance.”
Germany’s economic activity lost much more momentum than anticipated in June, driven by a slowdown in services and sustained weakness at the country’s factories, according to business surveys by S&P Global. Separate data for France showed its economy probably slumped in the three months through June. The euro fell sharply following the figures.
Read more: Euro-Zone Activity Almost Stalls as Recession Rebound Fades
Concern about the economic outlook was reflected in a rotation into bonds and out of stocks in weekly flow data. Investors yanked $5 billion from global equity funds in the week through Wednesday and added $5.4 billion to bonds.
US stocks face more downside than upside over the next two months as banks and property firms “still have bad recession vibes,” according to the note from Bank of America strategists citing EPFR Global data.
Read more: Bonds Rally, Euro Falls on Fears Economy Is Starting to ‘Buckle’
On Thursday the Bank of England unexpectedly raised its benchmark interest rate by a half percentage point and warned it may have to hike again, casting doubt over whether it can engineer a soft economic landing. With a rise in UK retail sales in May indicating persistent forces feeding inflation, money markets on Friday fully priced a terminal policy rate of 6.25% in February, which would be the highest level in more than two decades.
The week also saw Norway’s central bank accelerate its hikes and pledge more aggressive tightening, intensifying its response to stubborn inflation and a weak currency.
Key events this week:
- Fed Bank of St. Louis President James Bullard speaks, Friday
Some of the main moves in markets:
Stocks
- The S&P 500 fell 0.8% as of 9:30 a.m. New York time
- The Nasdaq 100 fell 1.1%
- The Dow Jones Industrial Average fell 0.7%
- The Stoxx Europe 600 fell 0.6%
- The MSCI World index fell 0.9%
Currencies
- The Bloomberg Dollar Spot Index rose 0.3%
- The euro fell 0.5% to $1.0896
- The British pound fell 0.2% to $1.2717
- The Japanese yen rose 0.2% to 142.87 per dollar
Cryptocurrencies
- Bitcoin fell 0.2% to $30,110.05
- Ether fell 0.6% to $1,876.46
Bonds
- The yield on 10-year Treasuries declined 10 basis points to 3.69%
- Germany’s 10-year yield declined 17 basis points to 2.32%
- Britain’s 10-year yield declined 11 basis points to 4.26%
Commodities
- West Texas Intermediate crude fell 2.7% to $67.60 a barrel
- Gold futures rose 1.1% to $1,943.90 an ounce
This story was produced with the assistance of Bloomberg Automation.
–With assistance from David Watkins, Greg Ritchie, Denitsa Tsekova, Macarena Muñoz, Isabelle Lee and Carly Wanna.
(Corrects index name for Russell 2000 in first bullet.)
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