LONDON/SYDNEY – World shares sank to two-year lows on Wednesday, hammered by spiralling borrowing costs that intensified fears of a global recession and sent investors into the arms of the safe-haven dollar.
Yields on U.S. 10-year Treasuries topped 4 percent for the first time since 2010 as markets wagered the Federal Reserve might have to take rates past 4.5 percent in its crusade against inflation.
The pound came under fire again on the back of a renewed surge in UK bond yields that have driven the government’s borrowing costs above those with heavier debt burdens such as Greece or Italy.
The International Monetary Fund (IMF) and ratings agency Moody’s criticized Britain’s new economic strategy. Investors braced for more havoc in bond markets that has already forced the Bank of England to promise “significant” action.
Central banks around the world have jacked up interest rates in the last week and said they would do whatever it takes to fight red-hot inflation, particularly as the northern hemisphere winter risks exacerbating a global energy crunch.
“It is now clear that central banks in advanced economies will make the current tightening cycle the most aggressive in three decades,” said Jennifer McKeown, head of global economics at Capital Economics.
“While this may be necessary to tame inflation, it will come at a significant economic cost.
“In short, we think the next year will look like a global recession, feel like a global recession, and maybe even quack like one, so that’s what we’re now calling it.”
The MSCI All-World index lost 0.65 percent to hit its lowest since November 2020. It’s heading for a 9 percent drop in September – set for its biggest monthly decline since March 2020’s 13 percent fall.
In Europe, the STOXX 600 shed 1.2 percent in early trading, led by declines in industrials such as steelmaker ThyssenKrupp and aluminium maker Norsk Hydro.
Across the region, the export-sensitive DAX <.GDAXI > fell 1.7 percent to its lowest since late 2020, while the FTSE 100 fell nearly 2 percent, in line with other battered UK assets.
S&P 500 futures dropped 0.9 percent, while Nasdaq futures lost 1.2 percent. If the benchmark index falls at the open later, this will mark the S&P 500’s seventh day of losses.
European government bonds came under pressure again as the region’s energy crisis intensified following a series of incidents that caused leaks on the Nord Stream pipeline.
Germany’s 10-year government bond yield, rose 5 basis points (bps) to 2.3 percent after hitting a nearly 11-year high at 2.309 percent.
“European sovereign yields have soared to multi-year highs amid concerns about UK policy-making and a right-ward shift of Italian politics in the midst of still elevated inflation,” wrote analysts at JPMorgan in a note.
“The Italian 10-year spread to the German Bund has eclipsed 250bp, well above the 200bp mark we believe makes the ECB uncomfortable.”
Shaking investor confidence has been the collapse in sterling and UK bond prices, which could force some fund managers to sell other assets to cover losses.
Underlining the risk of yet higher interest rates, the chief economist at the Bank of England said the tax cuts would likely require a “significant policy response”.
Moody’s on Tuesday told the British government that large unfunded tax cuts were “credit negative” and could undermine the government’s fiscal credibility.
More risk premium, please
At the heart of this most recent sell-off was the British government’s so-called “mini-budget” last week that announced a raft of tax cuts and little in the way of detail as to how those would be funded.
Gilt prices have plunged, the pound has hit record lows as a result.
George Saravelos, global head of FX strategy at Deutsche Bank Research, said investors now wanted more to finance the country’s deficits, including a 200-basis-point rate hike by November and a terminal rate up at 6 percent.
“This is the level of risk premium that the market now demands to stabilize the currency,” said Saravelos. “If this isn’t delivered, it risks further currency weakening, further imported inflation, and further tightening, a vicious cycle.”
Sterling fell 0.5 percent to $1.0685, still above Monday’s record trough of $1.0327 and set for its biggest monthly slide since the Brexit vote in June 2016.
The safe-haven dollar has been a major beneficiary from the rout in sterling, rising to a fresh 20-year peak of 114.680 against a basket of currencies.
The euro fell for a sixth straight day, dropping 0.35 percent to $0.9560 narrowly off last week’s 20-year low of $0.9528.
The dollar also touched a record high on the offshore-traded Chinese yuan at 7.2387, having risen for eight straight sessions.
The mounting pressure on emerging market currencies from the dollar’s rise is in turn adding to risks that those countries will have to keep lifting interest rates and undermine growth.
The ascent of the dollar and bond yields has also been a drag for gold, which was hovering at $1,624 an ounce after hitting lows not seen since April 2020.
Oil prices fell again as demand worries and the strong dollar offset support from U.S. production cuts caused by Hurricane Ian.
Brent fell 2 percent to $84.45 a barrel, while U.S. crude dropped 2.4 percent $76.61 a barrel.