Summary
- S. stocks fall
- European, Asian shares also slide
- VIX fear gauge rises 6%
- Dollar strong after Sterling plunge
- Gold, oil down in choppy trading
U.S. stocks and oil prices dropped in turbulent trading Monday, even as Treasury yields and the dollar climbed, as Wall Street absorbed a raft of what it read as unpleasant macroeconomics news.
With markets already agitated from central bank signal of further interest rate rises, U.K. government fiscal plans announced Friday continued to stir up markets. The pound plunged to a record low on Monday and a renewed selloff of British gilts drove euro zone bond yields higher.
U.S. stocks were mixed to begin the week but soon dropped by midday Monday. The S&P 500 (.SPX) and the Dow Jones Industrial Average (.DJI) both slumped by nearly 1%, while the Nasdaq Composite (.IXIC) fell by around 0.2%.
Global equities also dropped on concerns about high interest rates continued to apply pressure on the financial system, although reaction to Italy’s election result, where a right-wing alliance won a clear majority, was moderated.
Europe’s STOXX 600 index (.STOXX) slid to reach a new low since December 2020, last down 0.4 percent on the day. Asian stocks (.MIAPJ0000PUS) slipped 1.7%.
“I think everyone felt they were swimming in a tsunami of newsflow last week after one of the most incredible macro weeks in recent memory,” Deutsche Bank strategist Jim Reid wrote in a client note on Monday.
That wave of mainly negative information propped Wall Street’s so-called fear index, the VIX (.VIX), up about 6% on the day – nearing levels not seen since October 2020.
The sterling fell to a record low against the dollar, last trading down almost 1.4%. The Bank of England said on Monday it would not reluctant to change interest rates and was observing markets “very closely” after the pound slumped.
Interestingly, the pound’s declines are partly caused by dollar strength, which rose to a new 20-year top of 114.58 in early trade. It was last at $114.06, up roughly 0.8%.
“The Bank of England is in a very difficult spot where if they don’t react, they risk another sterling collapse and things getting very messy,” said Mike Riddell, senior portfolio manager, Allianz Global Investors.
“If they do react, a developed market hiking rates to defend the currency looks like an emerging market. So they’re damned if they do, damned if they don’t.”
Stress Building In Wall Street
European government bonds were also affected. Five-year UK government bond yields rose 50 bps to their highest since October 2008, pushing euro zone bonds higher. Germany’s 10-year government bond yield rose to its highest since December 2011 at 2.132%, DE10YT=RR and Italy’s benchmark bond yields hit their highest since 2013.
In the U.S., Treasury yield also jumped to new highs on Monday as concerns endured that central banks worldwide will continue tightening monetary policy to fight persistently high inflation. Two-year Treasury yields, which tend to be more reactive to interest rate changes, jumped to a near 15-year high of 4.214%, and benchmark 10-year note yields rose to 3.859%.
Oil prices reached nine-month lows on Monday in choppy trade, pushed by a strengthening dollar as market participants expected details on new sanctions on Russia. U.S. crude dropped 2.15% to $77.05 per barrel and Brent last traded at $84.30, down 2.15% on the day.
Buy Crypto NowSpot gold fell 0.8% to $1,630.41 an ounce, after falling to its lowest price since April 2020 at $1,626.41.
Samy Chaar, chief economist at Lombard Odier, stated:
“There has been an economic logic at play, as central banks raised rates to drive monetary policy into restrictive territory, get below trend growth for a while – a polite way of saying a recession – and then you get lower inflation.
The question is whether the financial world can go through that sequence. It feels like we are reaching the limit of that, things are starting to break, for example, what we see with sterling.”
