Global Risk Assets Tumble as Pressure on UK Mounts: Markets Wrap

(Bloomberg) -- Global risk assets extended their selloff on Monday as fears of faster inflation and global recession continued to rise. 

UK markets were in focus as the pound crashed to an all-time low and bond yields surged to the highest in more than a decade, sparking talk of emergency action by the Bank of England. The market mayhem unleashed by the government’s fiscal plan on Friday went into overdrive after the government pledged further tax cuts.  

The pound pared losses after Sky News reported that the BOE is expected to make a statement today.

An index of global stocks traded to the lowest since 2020, while US futures dropped on fears that Federal Reserve rate hikes to combat persistently elevated inflation will hurt the economy and a measure of volatility jumped. European equities extended declines after sliding into a bear market on Friday, with mining and energy stocks underperforming as metals and oil fell.

“We’re in a period of global gloom, with pessimism blanketing different countries for different reasons,” said Ed Yardeni, president of his eponymous research firm, who warned of growing storm clouds for the US economy. “The latest data jibe with our growth recession scenario, but the risks of a full-blown recession are obviously increasing,” he wrote in a note Monday.

Currency traders are finding developed markets trickier to navigate than their emerging counterparts.

Sterling dropped to as low as $1.0350, taking it closer to parity with the dollar, though it subsequently pared its loss to about $1.08. The plunge in UK gilts sent 10-year yields above 4% for the first time since 2010. 

The euro fluctuated as investors weighed the prospects of Italy under the most right-wing government since World War II. Giorgia Meloni struck a conciliatory tone after her election win and traders were far more concerned about the UK meltdown anyway. 

Geopolitical risks from the war in Ukraine to escalating tensions over Taiwan and unrest in Iran also weighed on sentiment. Meanwhile, the OECD cut almost all growth forecasts for the Group of 20 next year while anticipating further interest-rate hikes, and a gauge of German business confidence deteriorated. 

Treasuries extended their worst bond slide in decades as a dollar gauge rose to yet another record. The currency’s rally is “untenable” for risk assets, according to a note by Morgan Stanley strategists led by Michael Wilson.

In Asia, the yen weakened through 144 to the greenback, while remaining short of the point last week that drew intervention from Japanese authorities. The yuan fell for a sixth day in the longest losing streak in three years, even as China said it would raise the risk-reserve requirement to increase the cost for shorting the currency. 

“It’s a king US dollar,” Sian Fenner, senior Asia economist for Oxford Economics, said on Bloomberg TV. “It’s adding to inflationary pressures and more central banks raising rates more than we have historically seen.”

Trading this week will be punctuated by a number of economic reports including US initial jobless claims and gross-domestic-product data, along with PMI figures from China. Choppiness in price moves is likely with a steady stream of Federal Reserve officials speaking through the week.

Key events this week:

• Fed officials Susan Collins, Raphael Bostic, Loretta Mester speak at events, Monday
• ECB President Christine Lagarde at the European Parliament, Monday
• China industrial profits, Tuesday
• US new home sales, Conference Board consumer confidence, durable goods, Tuesday
• Fed Chair Jerome Powell and Charles Evans speak at events, Tuesday
• Fed’s Mary Daly, Rafael Bostic, Charles Evans and ECB President Christine Lagarde speak at events, Wednesday
• Euro zone economic confidence, consumer confidence, Germany CPI, Thursday
• US initial jobless claims, GDP, Thursday
• Fed’s Loretta Mester, Mary Daly speak at events, Thursday
• China PMI, Friday
• Euro zone CPI, unemployment, Friday
• US consumer income , University of Michigan consumer sentiment, Friday
• Fed’s Lael Brainard and John Williams speak, Friday

Some of the main moves in markets:

Stocks

• Futures on the S&P 500 fell 0.7% as of 7:43 a.m. New York time
• Futures on the Nasdaq 100 fell 0.6%
• Futures on the Dow Jones Industrial Average fell 0.6%
• The Stoxx Europe 600 fell 0.4%
• The MSCI World index fell 2%

Currencies

• The Bloomberg Dollar Spot Index rose 0.6%
• The euro fell 0.4% to $0.9646
• The British pound fell 0.6% to $1.0795
• The Japanese yen fell 0.6% to 144.21 per dollar

Cryptocurrencies

• Bitcoin fell 0.3% to $18,838.52
• Ether rose 0.1% to $1,294.15

Bonds

• The yield on 10-year Treasuries advanced nine basis points to 3.78%
• Germany’s 10-year yield advanced nine basis points to 2.11%
• Britain’s 10-year yield advanced 29 basis points to 4.12%

Commodities

• West Texas Intermediate crude fell 1% to $77.97 a barrel
• Gold futures fell 0.5% to $1,647.20 an ounce

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