Stocks fell and bond yields hit multi-year highs after a large number of global central banks joined the Federal Reserve in raising interest rates to curb scorching inflation levels at the expense of economic growth.
The sell-off in tech giants weighed on stocks, with the Nasdaq 100 underperforming, while the S&P 500 was just 2.5 percent from its June bottom. Ten-year US yields hovered near 3.7 per cent, the highest since February 2011, while the two-year rate was above 4.1 per cent. Traders also analyzed a news report that says Credit Suisse Group AG is discussing a possible market exit from the US.
The dollar remained at an all-time high. Driven by the Fed’s hawkish policy and investors seeking a haven from the swoon in the market, the dollar rose against its peers by the most in decades. The move prompted Japan to support the currency for the first time since 1998. The Swiss franc fell the most since 2015 against the euro after the central bank’s hike proved insufficient to meet traders’ expectations.
The Fed gave the clearest signal yet that it is willing to take on a recession as the necessary trade-off to regain control of inflation, with officials signaling another 1.25 percentage points of tightening before the end of the year. Norway, Britain and South Africa also followed suit with increases of their own as officials scrambled to control rampant price increases.
Krishna Guha, Vice President of Evercore ISI: “We see this new higher and longer price trajectory associated with a much higher probability of a hard landing and therefore not only unequivocally tough but unequivocally bad for risk.”
The S&P 500 could be poised for a further decline after a rare technical index breakout, according to Berenberg strategists, including Jonathan Stubbs.
It has been trading below its 200-day moving average for more than 100 sessions – a line that was previously only broken during the tech bubble and global financial crisis of the past 30 years. Either way, the gauge recorded most of its losses after crossing that level, with the index dropping another 50 percent in 2000-2003 and 40 percent in 2008-2009 before easing back.
Head of equities and quantitative strategist at Evercore Julian Emanuel lowered his year-end forecast for the S&P 500 index to 3,975 from 4,200 and expects a “full retest” of the June low in the coming weeks. The target cut represents a growing possibility of a recession after Federal Reserve Chairman Jerome Powell warned that a rate hike would not be “painless” for the labor and housing markets.
“The bad news is that we are still in one of the weakest seasonal windows of the year, especially in the middle of the year,” said Jonathan Krinsky, chief market technician at BTIG. The good news is that it reverses quickly by mid-October. We believe we test or break the June lows before then, which should constitute a better entry point for the year-end rally.”
Dennis DeBusschere at 22V Research expects markets to remain volatile as he maintains his neutral and range-bound stance on stocks.
“It’s hard to go long for signs of slowing underlying demand growth, but tail risks are limited by already tighter financial conditions, lower private equity, and higher implied volume,” he wrote.
Against the current background, Mark Heffel of UBS Global Wealth Management says the environment is not suitable for a strong directional placement on aggregate indicators. However, he advises against relegating to the sidelines, “particularly given the constraints on liquidity from rising inflation and the challenge of timing to return to the markets without losing the recovery.”
“Instead, we remain invested but also selective, focusing our preferences on the themes of defense, income, value, diversification, and security,” he added.
Here are some of the major moves in the markets:
- The S&P 500 was down 0.7 percent as of 11:34 a.m. New York time
- The Nasdaq 100 index fell 1.2 percent
- The Dow Jones Industrial Average fell 0.3 percent
- The Stoxx Europe 600 Index fell 1.8 percent
- The MSCI World Index fell 1 percent
- Bloomberg spot dollar index rose 0.1 percent
- The euro fell 0.1 percent to $0.9826
- The British Pound is little changed at $1.1260
- The Japanese yen rose 1.3 percent to 142.16 per dollar
- The 10-year Treasury yield advanced 16 basis points to 3.69 percent
- Germany’s 10-year bond yield advanced eight basis points to 1.98 per cent
- UK 10-year bond yield advances 19 basis points to 3.50 per cent
- West Texas Intermediate crude rose 1.3 percent to $84 a barrel
- Gold futures rose 0.3 percent to $1,680.30 an ounce