Fed Equity Risk; Dollar, bond yields are rising

NEW YORK (Reuters) – Global stocks fell for a second day in a row on Tuesday as government bond yields and the U.S. dollar clung to multi-year highs, as rising inflation prompted investors to brace for what could be the biggest in the United States. The interest rate hike in 28 years this week.

Surprisingly strong US inflation data released on Friday fueled bets that the Federal Reserve should tighten monetary policy more aggressively to tame high prices. Fears that a steady string of interest rate hikes could cause a higher recession in global stocks on Monday.

Investors are almost certainly betting that the Fed will announce a 75 basis point interest rate increase – the largest since November 1994 – at the end of its two-day policy meeting on Wednesday. This will be the third rate increase this year after two increases of 50 basis points. Read more

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“The 75 basis point increase is more consistent with the Fed’s previous desire to raise interest rates ‘urgently’ to neutral,” Goldman Sachs analysts said in a note to clients on Tuesday, adding that a “restrictive policy stance is necessary to tame inflation.” . “

Analysts said they expect the Fed to raise interest rates by another 75 basis points in July, and expect higher rates to likely lead to a recession in mid-2023.

Recession fears and uncertainty over rate prospects weighed on stocks. The Dow Jones Industrial Average (.DJI) fell 0.5% to a 16-1/2-month low, and the S&P 500 (.SPX) fell 0.38%. The Nasdaq Composite Index (.IXIC) bucked the trend and managed to gain 0.18%.

The S&P 500 plunged into bear market territory on Monday after falling more than 20% since a record close on January 3.

The index is now trading at a more attractive valuation of about 17 times the forward price-to-earnings ratio, according to data provider Datastream. This is roughly in line with the 10-year average, and compares to a reading of over 20 before the market corrected.

The MSCI Worldwide Stock Index (.MIWD00000PUS) is down 0.65% to levels last seen in November 2020, while the European Stock Index (.STOXX) is down 1.26% to its lowest level in March 2020.

Confirming the rising interest rate expectations in the US, 2-year Treasury yields rose to 3.4560%, the highest since November 2007, while 10-year Treasury yields hit an 11-year high at 3.4980%.

Markets are now seeing the Fed’s rate hike cycle peak around 4%, a whopping 100 basis points rise above 3% last month. Read more

Eurozone government bond yields also reached multi-year highs, as core and periphery spreads widened amid concerns about faster policy tightening by central banks.

Repricing investors to higher rates has destroyed assets that benefited from lower interest rates, including stocks, cryptocurrencies, junk-rated bonds, and emerging markets.

Fed final interest rate

“Quite simply, when we see a monetary tightening of the order of what we see globally, something is going to break,” said Timothy Graf, head of macroeconomic strategy for EMEA at State Street.

“Stock markets reflect the reality of the first impact of tightening financial conditions,” Graf said, predicting more pain as US stock valuations remain above COVID-era lows.

“I think there are other shoes to leave,” he said.

MSCI’s broadest index of Asia Pacific shares outside Japan (.MIAPJ0000PUS) closed 0.59% lower, tracking Wall Street’s losses, while Japan’s Nikkei (.N225) lost 1.32%.

Cryptocurrency markets, with bitcoin and ether hovering near 18-month lows, were also affected by interest rate expectations and crypto lender Celsius Network’s decision to freeze withdrawals. Read more

Bitcoin, which fell to $20,816, has recovered somewhat but is still down 2.7%.

Brent crude futures fell 1.17% to $120.84 a barrel, as investors worried about rising interest rates curbing demand, and a proposed US tax on oil company profits.

Graf of State Street did not see a recession as inevitable, but said the possibility increased with “monetary tightening and pressure on real income from commodity prices.”

Higher yields and a flight from risk helped the dollar to rise to a 20-year high against a basket of currencies.

The dollar index, which measures the greenback against a basket of six major currencies, rose 0.3% after hitting a high of 105.65.

A strong dollar held the euro near a one-month low of $1.04160 and pressured the Japanese yen, which hit a new 24-year low of 135.42 against the dollar.

With the Bank of Japan expanding bond purchases on Tuesday and unlikely to budge on ultra-low interest rate policy at its meeting on Friday, a respite for the yen looks unlikely.

“Looking at Wednesday, the Fed could see a 75 basis point rise and flag up more, while the Bank of Japan on Friday will only announce more bond purchases, the yen won’t stay at these levels for long. It will get a lot worse.” All told, Rabobank strategist Michael said.

The impact of the strong dollar and higher yields on gold. Spot gold fell 0.53% to 1809.40 an ounce.

dollar king
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Reporting from Sujata Rao; Additional reporting by Scott Murdoch and Elon John in Hong Kong; Editing by Alex Richardson, Mark Heinrich, Leslie Adler and Richard Chang

Our Standards: Thomson Reuters Trust Principles.

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