Stocks plummet to a 2-year low as the reality of rates bites

A man stands in front of a billboard showing the exchange rate of the Japanese yen against the US dollar outside an intermediary, after Japan intervened in the currency market for the first time since 1998 to support the battered yen, a Tokyo, Japan, September 22, 2022. REUTERS / Kim Kyung-Hoon

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  • The MSCI AxJ index slipped by 1%; Wobbly S&P 500
  • Yen stable but traders wary of further action

SYDNEY, Sept. 23 (Reuters) – Equities hit a two-year low on Friday and bonds took large weekly losses as the prospect of a further and faster-than-expected US interest rate hike shocked investors, while a Rising dollar made foreign exchange markets nervous following Japan’s intervention.

Interest rates rose sharply this week in the US, Britain, Sweden, Switzerland and Norway, among other places, but it was Federal Reserve members’ prospects for consistently high US rates through 2023 that kicked off. to the last round of sales.

On Friday, the MSCI global equity index (.MIWD00000PUS) hit a low since mid-2020 and fell about 12% in the month or so since Fed Chairman Jerome Powell made it clear that reducing inflation would hurt. .

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S&P 500 futures struggled to stabilize in the Asian session and fell 0.1%, while European futures remained flat. The MSCI index of Asian equities outside Japan (.MIAPJ0000PUS) fell 1%. Unless it rebounds, it’s on track for the worst month since March 2020.

“Reality is coming,” said Sean Taylor, Chief Investment Officer of Asia Pacific at DWS in Hong Kong.

“You had a market that believed rates would go down next year … a lot has changed now,” he said. “And the stock market is now adjusting.”

The bond and currency markets are also not docked, with the latest US rate hike extending a dollar rally that is starting to cause some discomfort for trading partners.

The euro and yen fell to 20-year lows on Thursday, until Japanese authorities entered the market for the first time since 1998 to buy yen and halt its long decline. Read more

The resulting spike has the yen up to 142.20 per dollar and well on its way to its best week in more than a month, although analysts say the yen lull is likely to be short-lived.

Other currencies were struggling for traction. The euro was at $ 0.9825, just above its low of $ 0.9807.

The Australian and New Zealand dollars have been nearing their lowest levels since mid-2020, the pound has been parked at its lowest level in nearly four decades, and 7.1028 per dollar for the Chinese yuan is a staggering distance from an all-time low.

VOLATILITY NOW

Bond markets have been in crisis as both investors and policymakers grapple with the extent to which short-term rates will need to rise to tame uncontrolled inflation around the world.

Britain is a case in point. On Thursday, a divided Bank of England raised rates by 50 basis points (bps), disappointing currency traders, as it promised bond sales and further hikes that, coupled with fiscal policies, pushed gilts down the curve.

Two-year gilt yields increased nearly 50bps this week, on track for their worst week in 13 years.

Later Friday, new finance minister Kwasi Kwarteng will announce a fiscal plan that is likely inflationary and even more bad news for gilts. Read more .

Treasuries were not traded in Asia due to a public holiday in Japan, but longer-dated issues were dumped overnight, bringing the 10-year yield up about 20 basis points to 3bps. , 71%.

“The 10 years have kept pace with the newly calibrated exchange rate,” said Damien McColough, Westpac’s head of rate strategy in Sydney.

“If you think the front end will peak at 4.60%, can you really sustain 10-year bond yields at 3.70%?” He said.

“It’s very shady price action … I think this volatility will continue in all markets in the short term (until the rate market stabilizes.”

In commodity markets, oil was on track for a small weekly loss as rate hikes raised concerns about demand. Brent crude futures settled at $ 90.07 a barrel in Asia on Friday.

Gold, which pays no income, suffered from rising US yields and the latter remained stable at $ 1,669 an ounce.

Bitcoin was similarly mistreated while fleeing risky assets and held at $ 19,423.

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Editing by Sam Holmes and Kim Coghill

Our Standards: Thomson Reuters Trust Principles.

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