Through Wayne Cole
Sydney The risks of more aggressive rate hikes in the United States and Europe pushed bond rates and the dollar substantially higher on Monday, while also fueling concerns of a worldwide recession.
The market participants’ hopes that the central bank would once again save the day were dashed when Federal Reserve Chair Jerome Powell warned of “painful” policy changes to deal with inflation.
Isabel Schnabel, a member of the European Central Bank’s board of directors, warned over the weekend that central banks must now move aggressively to combat inflation, even if it drags their economies into recession.
Related: Wolf of Wall Street compares low-capitalization cryptocurrencies to penny stocks.
This caused Euribor futures to drop sharply, as markets priced in the possibility that the ECB could raise rates by 75 basis points next month and that interest rates would peak at a higher level.
Jason England, global bond portfolio manager at Janus Henderson Investors, stated that managing inflation is the Fed’s top priority and that the funds rate must reach a restrictive level of 3.5 to 4.0 percent.
Consequently, rates must remain elevated in order to achieve their inflation target of 2%. Hence, rate reductions factored into the market for next year are premature.
Futures prices show that there is a 73% chance that the Fed will raise interest rates by 75 basis points in September. This means that rates will peak between 3.75 and 4 percent and stay high for a longer time.
Much may depend on the August employment report released this Friday. Analysts anticipate a minor increase of 285,000 following July’s massive jump of 528,000.
The hawkish message did not sit well with Wall Street, as S&P 500 futures fell 0.9% on Monday after losing more than 3.0% on Friday.Futures for the Nasdaq fell 1.2% as the expectation of sluggish economic growth weighed on tech firms.
For the first time in two months, MSCI’s broadest index of Asia-Pacific equities outside Japan lost 2.0% on a daily basis. The Nikkei fell 2.5%, while the Kospi fell 2.0%.
In response to the ECB’s rate warnings, Chinese blue chips fell 0.7% and EUROSTOXX 50 futures fell 1.3%.
Related: Asian stocks fall as Powell, a rate-hike bet enthusiast, drums up speculation.
EURO STRUGGLES
The loud chorus from central banks increased global short-term yields and further inverted the Treasury yield curve as investors priced in a potential economic downturn. [US/]
Two-year U.S. yields increased nine basis points to 3.489%, the highest level since late 2007 and far higher than the 10-year yield of 3.13%. Europe-wide yield increases included double-digit increases in Italy, Spain, and Portugal.
All of these factors supported the safe-haven U.S. dollar, which soared to a new two-decade high of 109.450 against a basket of major currencies, surpassing the July record.
The dollar reached a five-week high against the yen and was last up 1% at 138.94, with bulls eyeing a retest of its July high of 139.38.
As Goldman Sachs (NYSE:GS) forecasted a recession in the United Kingdom, the pound plummeted to a 2-1/2-year low of $1.1653. Around $0.9920, the euro was in trouble, not far from its 20-year low of $0.99005 from the week before.
The head of international economics at CBA, Joseph Capurso, says that the EUR/USD could stay below parity this week.
Related: As interest rates rose, investors sold U.S. stocks.
“Energy security concerns will be at the forefront this week when Gazprom (MCX:GAZP) shuts down its mainline pipeline to distribute gas to Western Europe for three days from August 31 to September 2,” he added. Concerns exist that the gas supply may not be restored following the shutdown.
Natural gas futures in Europe rose by 38% last week, adding fuel to the inflation firestorm.
The rising dollar and yields have acted as a drag on gold, which was trading at $1,722 per ounce. [GOL/]
Oil prices increased due to speculation. On September 5, OPEC+ could reduce output during a meeting. [O/R]
US crude rose $1.08 to $94.14 per barrel.