A man wearing a face mask, following the outbreak of the coronavirus disease (COVID-19), stands on an overpass with an electronic board showing the Shanghai and Shenzhen stock market indices in the Lujiazui Financial District in Shanghai , China, on January 6, 2021. REUTERS/Aly Cancó
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LONDON, Aug 29 (Reuters) – Global shares fell on Monday as the growing risk of more aggressive interest rate hikes in the U.S. and Europe sent fresh pain into bond markets and pushed the dollar to new 20-year highs, as do recession fears. ride
Federal Reserve Chairman Jerome Powell, speaking at the Jackson Hole Symposium on Friday, said the Fed would raise rates as high as necessary to curb growth and keep them there “for a while” to reduce inflation well above of its 2% target.
Isabel Schnabel, a member of the board of the European Central Bank, has added to the market’s uneasiness. He warned on Saturday that central banks risk losing public confidence and must act forcefully to curb inflation, even if it drags their economies into recession. Read more
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As investors realized the reality that rates would stay higher for longer, even as the risk of a recession grew, two-year U.S. Treasury yields rose to their highest level since 2007 .
European shares fell to their lowest level in nearly six weeks and were last down 1% (.STOXX). US stock futures were deep in the red, with Japan’s top Nikkei falling more than 2.5% (.N225)
London markets were closed for a holiday, while MSCI’s index of global equities (.MIWD00000PUS) fell 0.7% to a one-month low.
“The message from Jackson Hole was loud and clear and not what the markets expected,” said Nordea chief analyst Jan von Gerich.
“Central banks need convincing evidence that inflation is coming down. This is bad news for the economy and risk appetite and raises the risk of a deeper recession if we get faster rate hikes.”
Investors increased bets on rate hikes in the United States and the euro zone, with a higher possibility of 75 basis point hikes by the Fed and the ECB hitting markets in September.
Fed funds futures are priced as high as a 73% chance the Fed will hike 75bps and see rates hit between 3.75% and 4.0%.
“Markets are focusing on discussing the ‘coordinated tightening’ message from Jackson Hole, as the ECB and Fed appear to be re-committed to creating price stability: yields are rising and assets in risk are a little lower since last week,” said Lars. Sparreso Lykke Merklin, Senior Analyst at Danske Bank.
A lot could depend on what the August US payrolls show this Friday. Analysts were looking for a modest increase of 285,000 after July’s blockbuster 528,000 gain.
DOWN
As investors braced for anticipated rate hikes, key indicators of equity market volatility soared.
The CBOE Volatility Index (.VIX), known as Wall Street’s fear index, rose to its highest since mid-July. The STOXX Euro Volatility Index (.V2TX), the European equivalent, jumped to its highest level in six weeks.
The aggressive heart of central banks pushed short-term yields higher globally, while further inverting the Treasury curve as investors priced in an eventual economic downturn.
US two-year yields rose to around 3.49%, the highest since late 2007 and well above 10-year yields at 3.13%. Yields also rose across Europe.
All that benefited the safe-haven dollar, which hit a new two-decade high of 109.48 against a basket of major currencies.
The dollar hit a five-week high against the yen and rose 0.75% to 138.66, with the bulls looking to retest their July high of 139.38.
Sterling sank to a 2½-year low of $1.1649 as Goldman Sachs warned the UK was heading into recession. The euro was struggling at $0.9950, not far from last week’s two-decade low of $0.99005. Read more
“Energy security fears will remain front and center this week as Gazprom shuts down its main pipeline to deliver gas to Western Europe for three days from August 31 to September 2,” said Joseph Capurso, head of international economics at CBA, referring to supplies from Russian gas giant Gazprom.
“There is a fear that the gas supply will not be switched back on after the shutdown.”
Those fears saw natural gas futures in Europe surge 38% last week, adding more fuel to the inflation bonfire.
The rising dollar and yields were a drag on gold, which was down 0.8% at $1,723 an ounce.
Oil prices rose on speculation that OPEC+ could cut output at a September 5 meeting. Brent was up 29 cents at $101.28, while US crude was up 49 cents at $93.50.
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Reporting by Dhara Ranasinghe; additional reporting by Yoruk Bahceli, Sam Indyk and Wayne Cole, editing by Susan Fenton
Our standards: the Thomson Reuters Trust Principles.