Image: Reuters Berita 24 English - Asian stocks fell on Monday as the risk of more aggressive interest rate hikes in the U.S. and Europe gre...
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| Image: Reuters |
Berita 24 English - Asian stocks fell on Monday as the risk of more aggressive interest rate hikes in the U.S. and Europe grew. This sent bond yields and the dollar sharply higher and put pressure on the prices of stocks and earnings.
Jerome Powell, the head of the Federal Reserve, said that he would use policy "pain" to keep inflation in check. This killed hopes that the central bank would save the markets like it had done so many times in the past.
Isabel Schnabel, a member of the board of the European Central Bank, warned over the weekend that central banks must now act forcefully to fight inflation, even if doing so drags their economies into recession.
The risk that the ECB might raise rates by 75 basis points next month caused Euribor futures to drop sharply.
Jason England, global bonds portfolio manager at Janus Henderson Investors, said, "The main takeaways are that taming inflation is the Fed's number one job and that the Funds Rate needs to get to a restrictive level of 3.5 to 4.0 percent."
"The rate will have to stay high until inflation falls to their target of 2%, so rate cuts that have already been priced into the market for next year are too soon."
Futures prices now show that there is a 64% chance that the Fed will raise rates by 75 basis points in September and that rates will peak in the 3.75–4.0% range.
Much could depend on the jobs report for August, which comes out this Friday. Analysts are expecting a moderate rise of 285,000 jobs after July's huge gain of 528,000.
The hawkish message was not what Wall Street wanted to hear, and S&P 500 futures fell another 1.1% after losing almost 3.4% on Friday. Nasdaq futures fell 1.5%, and tech stocks were hurt by the expectation that the economy will grow more slowly.
MSCI's biggest index of Asia-Pacific stocks outside of Japan fell 1.9%. The Nikkei in Japan fell 2.8%, and the KOSPI in South Korea fell 2.3%.
In response to the ECB's warnings about rates, Chinese blue chips fell 0.6% and EUROSTOXX 50 futures fell 1.7%.
EURO STRUGGLES
The aggressive chorus from central banks around the world pushed up short-term yields and inverted the Treasury curve even more as investors priced in an eventual economic downturn. [US/]
The two-year U.S. yield went up by seven basis points to 3.466%, which is the highest it has been since late 2007 and a lot more than the ten-year yield of 3.10%. Yields have also gone up across Europe, with Italy, Spain, and Portugal all seeing gains of more than 10%.
All of this helped the U.S. dollar, which is seen as a safe haven, shoot to a new 20-year high of 109.40 against a basket of major currencies, beating the previous high from July.
At 138.58, the dollar's value against the yen reached its highest level in five weeks. Bulls are looking to re-test the dollar's July high of 139.38.
The euro was struggling at $0.9927, which was close to last week's 20-year low of $0.99005, and the pound fell to a 2-1/2-year low of $1.1656.
Joseph Capurso, head of international economics at CBA, said, "EUR/USD could stay below parity this week."
"Fears about energy security will stay in the spotlight this week because Gazprom will shut down its mainline pipeline that sends gas to Western Europe for three days from August 31 to September 2," he said. "There are worries that the gas might not be turned back on after the shutdown."
Because of these fears, natural gas futures in Europe went up by 38% last week, which added more fuel to the fire of inflation.
Gold fell to $1,725 an ounce as a result of the rise of the dollar and yields. [GOL/]
Oil prices went up because of rumours. At a meeting on Sept. 5, OPEC+ could decide to cut production. [O/R]
Brent went up by 58 cents to $101.57 per barrel, and U.S. crude went up by 87 cents to $93.93 per barrel.
