Stocks slump to 2-year low as rates reality bites


A man stands in front of a board displaying the Japanese yen exchange rate against the US dollar outside a brokerage firm after Japan intervened in the foreign exchange market for the first time since 1998 to prop up the ailing yen, in Tokyo, Japan, March 22, 2022. REUTERS/Kim Kyung-Hoon

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  • MSCI AxJ Index slips 1%; S&P 500 futures wobble
  • Yen stable but traders wary of further action

SYDNEY, Sept 23 (Reuters) – Stocks hit two-year lows on Friday and bonds faced big weekly losses as the prospect of further and faster-than-expected rises in US interest rates unsettled investors, while a strengthening dollar weighed on currency markets after the intervention by Japan.

Interest rates rose sharply this week in the United States, Britain, Sweden, Switzerland and Norway, among others, but it was Federal Reserve members’ prospect of persistently high US interest rates into 2023 that sparked the latest round of selling.

MSCI’s world equity index (.MIWD00000PUS) hit its lowest level since mid-2020 on Friday, and is down about 12% in the month or so since Fed Chair Jerome Powell made it clear that cutting inflation would hurt.

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S&P 500 futures struggled to stabilize in the Asian session, falling 0.1%, while European futures were flat. The MSCI index of Asian equities outside Japan (.MIAPJ0000PUS) fell 1%. If it doesn’t bounce, it’s on track for its worst month since March 2020.

“The reality is coming through,” said Sean Taylor, chief investment officer for Asia Pacific at DWS in Hong Kong.

“They had a market that thought rates would go down next year… now that’s changed a lot,” he said. “And the stock market is now adjusting to that.”

Bond and currency markets are also derailed, with the recent hike in US interest rates extending a dollar rally that is beginning to unnerve trading partners.

The euro and yen fell to 20-year lows on Thursday before Japanese authorities stepped in for the first time since 1998 to buy the yen and halt its long slide. Continue reading

The resulting spike has sent the yen higher to 142.20 per dollar and is on course for its best week in more than a month, although analysts say the yen’s recovery is likely to be short-lived.

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Other currencies struggled for traction. The euro traded at $0.9825, just above its low of $0.9807.

The Australian and New Zealand dollars are hovering near their lowest levels since mid-2020, sterling is at its lowest in almost four decades, and China’s yuan is within striking distance of a record low at 7.1028 per dollar.

VOLATILITY NOW

Bond markets are in a meltdown as both investors and policymakers struggle with how far short-term rates need to rise to tame runaway inflation around the world.

Great Britain is a case in point. On Thursday, a divided Bank of England hiked interest rates by 50 basis points (bps), disappointing forex traders while promising bond selling and more rate hikes which, along with fiscal policy, weighed on gilts along the curve.

Two-year gilt yields are up almost 50 basis points this week and are on course for their worst week in 13 years.

Later on Friday new finance minister Kwasi Kwarteng is set to announce a fiscal plan that is likely to be inflationary and more bad news for gilts. Continue reading .

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Government bonds were not trading in Asia due to a public holiday in Japan, but longer-dated issues were sold overnight, pushing the 10-year yield up about 20 basis points to 3.71%.

“The 10-years caught up with the recalibrated cash rate,” said Westpac’s Head of Rates Strategy, Damien McColough, in Sydney.

“If you think the front-end is going to peak at 4.60%, can you really keep 10-year bond yields at 3.70%?” he said.

“It’s a very jittery price move… I think this volatility will continue in all markets for the foreseeable future (until) the rates market settles down.”

In commodity markets, oil was on track for a small weekly loss as interest rate hikes raised demand concerns. Brent crude futures fluctuated at $90.07 a barrel in Asia on Friday.

Non-returning gold has suffered from the rise in US yields and last traded at $1,669 an ounce.

Bitcoin was also hit by the flight from risky assets and held at $19,423.

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Edited by Sam Holmes and Kim Coghill

Our standards: The Thomson Reuters Trust Principles.



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