World stocks fell for a fifth straight session and the dollar hit its strongest since March on Thursday as Treasury yields rose to levels last seen before the Great Financial Crisis after the U.S. Federal Reserve warned rates will stay higher for longer.
The Fed on Wednesday kept its key lending rate steady, as expected, but indicated another hike is possible as it and other central banks tighten policy to tame inflation.
The British pound and the Swiss franc tumbled after the Bank of England and Swiss National Bank refrained from raising rates, both surprise moves, but the central banks of Norway and Sweden each hiked by a quarter percentage point as expected.
Major equity indices in Europe fell more than 1% and stocks on Wall Street slid on concerns higher rates will curb growth. The question is whether the market shrugs off higher rates as in the past on expectations the Fed will cut rates as the economy slows.
“For the last year there’s been a gap for this hopeful optimism by investors that the Fed is near done or we’ll be done and the Fed continues to suggest we’re not so sure,” said Michael Arone, chief investment strategist at State Street Global Advisors in Boston.
“You are seeing some subtle shifts in both stocks and in the bond markets to reflect higher for longer, to reflect the uncertainty that the Fed is in fact nearing the end of its tightening cycle,” he said.
Futures pared back expectations the Fed’s target rate will stay above 5% through late July 2024 from September next year, as indicated on Wednesday.
But rates moved higher. The two-year Treasury yield, which reflects interest rate expectations, rose 1.1 basis points to 5.131%, while the yield on the benchmark 10-year note was up 12.5 basis points at 4.472%, a fresh 16-year high.
Saxo Bank analyst John Hardy said Europe’s central bank moves showed there was now more uncertainty about both when and where interest rates max out.
“Different countries are in different gears so it is real data-driven responses we are seeing now, especially for the UK,” Hardy said following the BoE’s decision, which had been its first pause after 14 consecutive hikes.
“It punctures the balloon on terminal rates and also creates more second guessing on the quality of the (economic) landings.”
MSCI’s gauge of stocks across the globe shed 1.19%, firmly on course for a fifth day in the red, which will be its longest losing streak since March. The pan-European STOXX 600 index lost 1.07%.
U.S. stocks declined less. The Dow Jones Industrial Average fell 0.43%, the S&P 500 lost 0.92% and the Nasdaq Composite dropped 1.07%.
The dollar index, which measures the U.S. currency against a basket of currencies, rose as high as 105.59, its strongest since March 9, pushing the yen close to its weakest since November.
The dollar index later eased, down 0.038% at 105.35, with the euro down 0.01% to $1.0658.
Sterling, which has been on the slide since July, dropped through $1.23 to as low as $1.223. [/FRX]
Mirroring a rise in Treasury yields, Germany’s 10-year government bond yield touched a fresh six-month high of 2.73% and Britain’s 10-year gilt yield rose to 4.29% after falling on Wednesday to its lowest since July. [GVD/EUR]
Overnight in Asia, MSCI’s broadest index of Asia-Pacific shares outside Japan slumped 1.6% in what was its biggest move since early August. Japan’s Nikkei fared only slightly better with a 1.4% loss.
With a crucial Bank of Japan meeting still to come this week, Japan’s 10-year government bond yield rose to its highest in a decade.
Though the rise signals an expectation that the BOJ could finally move away from its easy money “yield curve control” policy, it was also tracking U.S. 10-year Treasury yields, which had risen to a 16-year high of 4.43% in the wake of the Fed.
U.S. crude rose 1.15% to $90.69 per barrel and Brent was at $94.34, up 0.87% on the day.[O/R]
Spot gold was down 0.6% at $1,918.99 an ounce. [GOL/]
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