The prospect of aggressive Federal Reserve monetary tightening lifted a dollar gauge to another record Wednesday, hurting stocks and commodities and sparking efforts in Asia to stem currency weakness.
An Asian equity gauge slid to levels last seen in the pandemic fallout of 2020, European futures shed about 1% and S&P 500 contracts retreated.
In Japan, the yen sank 1% and officials warned they are concerned about rapid, one-sided moves. China, meanwhile, set its yuan reference rate with the strongest bias on record — a signal of discomfort with a swooning currency.
Greenback strength stoked by higher Treasury yields and worries about the economic outlook is rippling across the world, leading to tighter financial conditions that could further undermine risk assets.
The 30-year US Treasury yield was around the highest since 2014 amid a bond selloff exacerbated by bets on another 75 basis points Fed interest-rate hike to tackle high inflation. The Bank of Japan said it would boost scheduled bond purchases as the nation’s 10-year rate neared the 0.25% upper limit.
Aside from tightening monetary settings and an apparently unstoppable dollar, markets are also contending with a debilitating energy crisis in Europe and Covid lockdowns in China. Concerns are growing about the outlook for company earnings given the various global economic headwinds.
“Many investors are walking on egg shells,” Kristina Hooper, chief global market strategist at Invesco, said on Bloomberg Television. “The real issue is that it could be a one-two punch. We could see the Fed continuing to pummel the economy with a significant rate hike, lets say 75 basis points, and then of course we get downward revisions to earnings that are significant.”
In commodities, crude plunged to the lowest since January and iron ore extended declines. Bitcoin flirted with a test of lows for the year and gold slipped below $1 700 an ounce.
The latest data, meanwhile, showed China’s export growth slowed more than expected in August, adding to signs of a flagging world economy. But the key driver of investor angst remains the Fed’s determination to make monetary policy restrictive until price pressures are conquered.
Fed Chair Jerome Powell “knows they need to be very aggressive for a lot longer than people think because they don’t only want to get inflation under control, they want to get it stable for a persistent period of time,” said Shana Orczyk Sissel, Banrion Capital Management founder and president, on Bloomberg Television.
What to watch this week:
- Apple event due to feature new iPhones, watches, Wednesday
- Bank of England Governor Andrew Bailey at Treasury Committee, Wednesday
- Fed’s Beige Book of regional economic activity, Wednesday
- Cleveland Fed President Loretta Mester due to speak, Wednesday
- European Central Bank rate decision, Thursday
- Fed Chair Jerome Powell due to speak, Thursday
- Chicago Fed President Charles Evans and his Minneapolis counterpart Neel Kashkari due to speak, Thursday
- EU energy ministers extraordinary meeting on emergency intervention in electricity markets, Friday
Some of the main moves in markets:
- S&P 500 futures fell 0.4% as of 7:04 a.m. in London. The S&P 500 fell 0.4%
- Nasdaq 100 futures dropped 0.4%. The Nasdaq 100 fell 0.7%
- Japan’s Topix index shed 0.6%
- Australia’s S&P/ASX 200 Index fell 1.4%
- South Korea’s Kospi lost 1.5%
- Hong Kong’s Hang Seng Index fell 1.8%
- China’s Shanghai Composite Index was steady
- Euro Stoxx 50 futures declined 1%
- The Bloomberg Dollar Spot Index rose 0.3%
- The euro was at $0.9891, down 0.1%
- The Japanese yen was at 144.09 per dollar, down 0.9%
- The offshore yuan was at 6.9818 per dollar, down 0.2%
- The yield on 10-year Treasuries dipped to 3.34%
- Australia’s 10-year bond yield rose six basis points to 3.71%
- West Texas Intermediate crude fell 1.6% to $85.48 a barrel
- Gold was at $1 696.28 an ounce, down 0.3%
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