Sydney (Reuters): Asian stock markets fell on Wednesday because rising borrowing costs made people more worried about a global recession. This made investors run to the dollar as a safe haven, which hurt currencies all over the region.
Yields on 10-year U.S. Treasuries went above 4% for the first time since 2010. This happened because markets thought the Federal Reserve might have to raise rates above 4.5% in its fight against inflation.
Moody’s warned that unfunded UK tax cuts would be “negative” for the country’s credit rating, which put more pressure on the pound and caused gilts to sell off even more.
Jennifer McKeown, head of global economics at Capital Economics, said, “It is now clear that central banks in advanced economies will make the current tightening cycle the most aggressive in three decades.”
“This may be necessary to keep inflation in check, but it will cost a lot of money.
“In short, we think the next year will look like a global recession, feel like a global recession, and maybe even quack like a global recession, so that’s what we’re now calling it.”
Rates going up and growth slowing down are not good for stocks, so MSCI’s broadest index of Asia-Pacific shares outside Japan (.MIAPJ0000PUS) dropped 2% to its lowest level since April 2020.
Related: The Chinese Yuan leads Asia’s currency decline as the US dollar reaches a 20-year high.
Japan’s Nikkei (.N225) fell 2.2%, and South Korean stocks (.KS11) fell 3.0%, reaching their lowest point in two years. Blue chips in China fell by 0.7%.
The bearish mood made S&P 500 futures fall 0.8%, while Nasdaq futures fell 1.0%. This would be the seventh time in a row that the S&P 500 fell, and it would put the important 200-week average at 3,590 at risk.
As European borrowing costs skyrocketed, EUROSTOXX 50 futures fell 1.0% and FTSE futures fell 1.1%.
Analysts at JPMorgan wrote in a note that “European sovereign yields have risen to multi-year highs because of worries about UK policymaking and a shift to the right in Italian politics amid still high inflation.”
“The spread between the Italian 10-year bond and the German Bund has gone over 250 bps, which is well above the 200 bps level that we think makes the ECB uneasy.”
The fall in the value of the pound and UK bonds has shaken investor confidence. This could force some fund managers to sell other assets to cover their losses.
The chief economist at the Bank of England said that the tax cuts would likely need a “significant policy response” because there was a chance that interest rates would go up even more.
Moody’s warned the UK government on Tuesday that big tax cuts without enough money to pay for them were “credit negative” and could hurt the government’s ability to handle money well.
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George Saravelos, global head of FX strategy at Deutsche Bank Research, said that investors now wanted more to pay for the country’s deficits, such as a 200-basis-point rate hike by November and a 6% terminal rate increase.
“This is the level of risk premium that the market needs now to stabilise the currency,” said Saravelos. “If this isn’t done, the currency could get weaker, there could be more imported inflation, and tightening could happen again.”
At $1.0644, sterling was under attack again, and its rise from Monday’s record low of $1.0327 stopped far short of the $1.1300 level that was held before last week’s UK Budget.
The yields on 10-year British gilts have gone up by a huge 119 basis points in just four sessions, to 4.50%. This is the biggest change since at least 1979.
The drop in the value of the pound has been very good for the dollar, which has risen to a new 20-year high of 114.680 against a group of currencies.
The dollar stayed at 144.75 yen, putting the Japanese government’s promise to keep the exchange rate at 145.00 to the test.
The euro fell again, this time to $0.9552, which is close to last week’s 20-year low of $0.9528.
Related: Asia’s stocks went up and down, and China cut interest rates because of bad data.
At 7.2387, the dollar hit a record high against the Chinese yuan that is traded outside of China. It had been going up for eight days in a row.
As the dollar goes up, it puts more and more pressure on currencies in emerging markets. This makes it more likely that these countries will have to keep raising interest rates, which hurts growth.
Gold has been hurt by the rise of the dollar and bond yields. It was hovering around $1,624 an ounce after hitting lows that hadn’t been seen since April 2020.
Oil prices fell again because of worries about demand and a strong dollar, which made up for the fact that Hurricane Ian cut production in the U.S.
Brent fell by $1.17 per barrel to $85.03, while U.S. crude fell by $1.10 per barrel to $77.40.
