Dollar soars and stocks fall as traders assess global growth outlook
The dollar surged and government bonds rallied on Monday as stock markets tumbled as traders weighed the prospect of further aggressive U.S. interest rate hikes and heightened risk recession in Europe.
The dollar index, which tracks the US currency against six others and has a heavy euro weighting, rose 1.2% to a new 20-year high. The rise helped bring the euro closer to parity with the greenback, with Europe’s common currency dropping as much as 1.5% to $1.0032, approaching a level not seen in nearly two decades.
The Japanese yen also fell to a new 24-year low against the dollar of ¥137.75 before strengthening slightly.
Over the past few weeks, market sentiment has swung between recognition that central banks need to raise interest rates aggressively to combat soaring inflation and fears that excessive monetary tightening could cause a global economic downturn.
Both stories have bolstered investor optimism towards the dollar, particularly as recession risks are perceived to be higher in Europe. The European Central Bank has followed the US Federal Reserve in tightening its monetary policy, but should remain as accommodative as possible to counter the economic shocks of Russia’s invasion of Ukraine.
“We expect an earlier recession in Europe,” said Sonja Laud, chief investment officer at Legal & General Investment Management. “The United States is an energy exporter, Europe is an importer, and in today’s energy price environment, that makes all the difference.”
Following surprisingly strong jobs data for June, analysts expect the Fed to hike rates as much as 0.75 percentage points at its July meeting to tame inflation, after a decision similar last month.
Still, investors have scaled back their expectations for the extent to which the US central bank will raise borrowing costs later in the year, with futures markets now pegging a benchmark rate of 3.5% for the start of 2023, against expectations of 3.9% in mid-June. The Fed’s current target range is 1.5 to 1.75%.
Expectations of how much the ECB will raise borrowing costs have also declined in recent weeks, with markets pricing a rate of just over 1% by February, from its current level of minus 0. .5%.
The Bank of Japan, meanwhile, defied the global trend of monetary policy tightening. On Monday, BoJ Governor Haruhiko Kuroda warned of “very great uncertainty” for the domestic economy in a strong signal that the central bank will maintain its easing stance.
Government debt markets rallied on Monday, with the yield on the 10-year US Treasury falling 0.12 percentage points to 2.98%. The policy-sensitive two-year yield slipped 0.06 percentage points to 3.06%, remaining above its longer-dated counterpart in a “reversal” scenario that has preceded every U.S. recession over the past few years. last 50 years. Bond yields fall as their prices rise.
The benchmark 10-year German Bund yield fell 0.09 percentage point to 1.19%.
In equity markets, Wall Street’s S&P 500 index, which rose last week after its worst first half in more than five decades, fell 1.2%. The tech-heavy Nasdaq Composite was 2.3% lower.
The European Stoxx 600 closed down 0.5%, following steep falls in China due to new Covid-19 restrictions.
Hong Kong’s Hang Seng stock index lost 2.8% and mainland China’s CSI 300 tumbled 1.7% after cities across China reimposed coronavirus restrictions to fight undergrowth. -highly contagious BA.5 Omicron variant.