Global stocks and government bonds sell off on inflation fears

Global stocks and government bonds sold off on Monday as investors ramped up their expectations of central banks raising interest rates aggressively to curb scorching inflation.

Europe’s Stoxx 600 share index declined 2.2 per cent, putting it on track for its fifth straight session of falls. The regional share gauge has lost more than 9 per cent so far this quarter.

Futures trading implied the US’s S&P 500 index would lose 2.4 per cent in early New York dealings. The broad stock barometer had fallen 2.9 per cent on Friday to close out Wall Street’s worst week since January. Contracts tracking the tech-heavy Nasdaq 100 index fell 3 per cent on Monday as more speculative stocks suffered in the flight from market risk.

Meanwhile, the cryptocurrency bitcoin — widely perceived as a proxy for investor sentiment towards riskier assets — traded below $24,000, having tumbled almost 20 per cent since Friday.

Analysts on Monday upgraded their forecasts of how far the US Federal Reserve will raise interest rates, with some speculating that it may implement an extra-large 0.75 percentage point increase at its monetary policy meeting this week.

US consumer price inflation hit an unexpectedly high annual rate of 8.6 per cent in May, data on Friday showed, as Russia’s invasion of Ukraine raised fuel and food costs. Money markets are now pricing a 3.4 per cent fed funds rate by December, from a range of 0.75 per cent to 1 per cent currently.

“I think with this latest [inflation] number the Fed is really going to go for it and this will cause an economic slowdown,” said Julian Howard, lead investment director for multi-asset solutions at fund manager GAM. “It’s all looking pretty ugly in the short term and there is nowhere really to escape from it, apart from going into cash for now.”

The yield on the two-year Treasury note, which reflects interest rate expectations, rose 0.16 percentage points to 3.21 per cent as the price of the instrument fell. The benchmark 10-year bond yield, which underpins global debt pricing, added 0.1 percentage point to 3.26 per cent.

Goldman Sachs, the US investment bank, on Monday raised its Fed policy forecasts to include 0.5 percentage point increases this week and again in July, September and November, with further quarter-point rises in December and January.

“There is very little chance of the Fed pivoting to support financial markets until there is a trend of very meaningful economic disappointments,” said Seema Shah, chief strategist at Principal Global Investors.

Analysts at Barclays predicted a 0.75 percentage point increase this week. In a research note, Standard Chartered strategists said they would “not preclude” such an outcome.

In Europe, the yield on Italy’s 10-year bond rose 0.18 percentage points to 4.02 per cent, more than quadruple its level in mid-December. This came after the European Central Bank last week paved the way for its first interest rate rise in more than a decade.

The pound fell 1.1 per cent against the dollar to just under $1.22, pushed down by a strengthening US currency and concerns for the UK’s economic outlook.

Economists see the Bank of England lifting its main borrowing rate by 0.25 percentage points on Thursday, with an increasing chance of a 0.5 percentage point rise, escalating fears of stagflation.

Elsewhere, the yen touched a 24-year low of ¥135.19 per dollar as traders bet on the Bank of Japan continuing to defy the global trend towards higher interest rates.

A broad FTSE index of Asian shares outside Japan fell 2.8 per cent and Tokyo’s Nikkei 225 lost 3 per cent.

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