Business

Stocks slump to 2-year low as rates reality bites

A man is silhouetted in front of a sign showing the exchange rate of the Japanese yen against the US dollar outside a brokerage, after Japan intervened in the foreign exchange market for the first time since 1998 to strengthen the battered yen, in Tokyo, Japan September 22, 2022 REUTERS/Kim Kyung-Hoon

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  • MSCI AxJ index slides 1%; S&P 500 futures shaky
  • Yen stable but traders wary of more intervention

SYDNEY, Sept. 23 (Reuters) – Stocks hit their two-year low Friday and bonds saw huge weekly losses as the prospect of US interest rates rising further and faster than expected left investors confused, while a rising dollar made foreign exchange markets wary after Japan’s intervention.

Interest rates in the United States, Britain, Sweden, Switzerland and Norway, among others, have risen sharply this week, but it was the Federal Reserve’s outlook for continued high U.S. rates through 2023 that triggered the latest round of sales.

Read:Sell Rosh Hashanah, Buy Yom Kippur? Revisiting The Market Adage In Turbulent 2022 – Ford Motor (NYSE:F), FedEx (NYSE:FDX)

MSCI’s world stock index (.MIWD00000PUS) hit its lowest since mid-2020 on Friday, falling about 12% in the month or so since Fed Chair Jerome Powell made it clear that pushing inflation back would hurt.

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S&P 500 futures struggled to hold steady in the Asia session, falling 0.1%, while European futures were flat. The MSCI Index of Asian Stocks Outside Japan (.MIAPJ0000PUS) fell 1%. Unless it bounces, it’s on track for its worst month since March 2020.

“Reality is coming through,” said Sean Taylor, Asia Pacific Chief Investment Officer at DWS in Hong Kong.

“You had a market that believed interest rates would fall next year… now a lot has changed,” he said. “And the stock market is now adjusting to that.”

Bond and currency markets are also on the loose, with the latest rise in US rates extending a rally in the dollar that is beginning to cause some discomfort for trading partners.

The euro and yen fell to their 20-year lows on Thursday, until Japanese authorities entered the market for the first time since 1998 to buy the yen and halt the long decline. read more

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The resulting spike has the yen up to $142.20 per dollar and on track for its best week in more than a month, although analysts say the yen’s delay will likely be short-lived.

Other currencies struggled to gain traction. The euro was at $0.9825, barely above the low of $0.9807.

The Australian and New Zealand dollars have fluctuated at their lowest levels since mid-2020, the pound sterling was at its lowest level in nearly four decades and at 7.1028 per dollar, the Chinese yuan is a striking distance from a record low.

VOLATILITY NOW

Bond markets have collapsed as investors and policymakers alike grapple with how far short-term interest rates need to rise to contain runaway inflation around the world.

Great Britain is an example of this. On Thursday, a divided Bank of England hiked interest rates by 50 basis points (bps), disappointing currency traders, while promising bond sales and further hikes that, along with fiscal policy, sent government bonds down the curve.

Two-year Treasury yields are up nearly 50 bps this week, on track for their worst week in 13 years.

Later on Friday, new finance minister Kwasi Kwarteng will announce a fiscal plan that is likely to be inflationary and even more bad news for gilts. Read more .

Read:Risk of Global Recession in 2023 Rises Amid Simultaneous Rate Hikes – Mish Talk

Treasuries were not traded in Asia due to a holiday in Japan, but longer-term issues were dumped overnight, pushing 10-year yields up about 20 bps to 3.71%.

“The 10-year was catching up on the newly calibrated cash interest rate,” said Damien McColough, Westpac’s head of rates strategy, in Sydney.

“If you think the front end will peak at 4.60%, can you really hold the 10-year bond yield at 3.70%?” he said.

“It’s very skittish price action… I think this short-term volatility will continue in all markets (until) the interest rate market settles down.”

In commodities markets, oil was on track for a small weekly loss as interest rate hikes raise demand. Brent oil futures hovered at $90.07 a barrel in Asia Friday.

No-income gold has suffered from the rise in US interest rates and last held steady at $1,669 an ounce.

Bitcoin has also been battered in the flight from risky assets and was held at $19,423.

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Editing by Sam Holmes and Kim Coghill

Our Standards: The Thomson Reuters Trust Principles.

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