London — Investors took to another bout of selling on Thursday as the dollar tightened its hold on the currency markets, recession fears sapped stocks and bonds suffered more interest rate pain.
Early trade in Europe was brutal; the Stoxx 600 share index dropped nearly 2% from the open, while the euro and the pound, hammered over the past week by UK debt concerns, slumped 1%.
Government bond markets were braced for German data expected to show consumer prices rising at the fastest rate there since the 1950s. Gilt selling also resumed a day after the Bank of England (BoE) dramatically intervened in the UK market to try to quell the storm over the government’s spending plans.
“The market wouldn’t mind some stability, it has become a little bit unpredictable,” said Agnes Belaisch, Barings Investment Institute’s chief European strategist.
Investors were now seeing “incoherence” in the UK, with the government spending as the BoE tries to rein in inflation, while everywhere else the focus is on how high central banks are prepared to go with interest rates.
Germany’s 10-year government bond yield, the benchmark of the eurozone, jumped to 2.27% as numbers from the German state of North Rhine-Westphalia pointed to a double-digit inflation figure for the country as a whole.
The UK 10-year gilt yield, which drives UK borrowing costs, rose 15 basis points to 4.16% after falling almost 50bps the day before after the BoE’s sudden intervention.
Prime Minister Liz Truss defended her economic programme that has sent sterling to a record low this week and left the UK’s borrowing costs close to Greece’s, saying it was designed to tackle the difficult situation Britain was now in.
Crushed
The broader market perspective was still about the dollar, which has virtually crushed all other currencies this year.
Speaking to reporters in London on Wednesday, veteran Federal Reserve policymaker Charles Evans gave no indication that any of the recent drama would blow the US central bank off its rate hike course.
“We just really need to get inflation in check,” Evans said, effectively backing plans to lift the Fed’s rates — now at 3%-3.25% — to a range of 4.5%-4.75% by the end of the year or March 2023.
The US dollar index, which measures the currency against sterling, the euro and four other peers, strengthened back towards its recent 20-year high again after its worst session in 2½ years on Wednesday.
China’s yuan fell again overnight, though it remained shy of recent post-financial crisis lows as the central bank said stabilising the foreign exchange market was its top priority.
MSCI’s broadest index of Asia-Pacific shares outside Japan ended the day little changed flat, though Japan’s Nikkei did manage a rise of almost 1%. S&P 500 futures pointed to Wall Street falling more than 1.2% later when more Fed policymakers are due to speak.
Reuters
