Stocks and bonds drop as UK debt selling ripples across global markets
Stocks and bonds fell at the end of a turbulent week, as the massive sell-off of British government debt crashed into global markets.
Europe’s regional Stoxx 600 Index is down 2.1 percent, a drop that has taken gauge losses from this year’s highs in early January to more than 20 percent, matching the definition of a technical “bear market”.
London’s FTSE 100 extended its initial decline to fall 1.9 per cent after Friday’s mini-Westminster budget, which detailed bold cuts in corporate and individual tax rates as part of a growth package aimed at spurring growth in the stagnant British economy.
UK government bond yields have jumped by historic amounts across all maturities amid concerns about the cost of government borrowing schemes, much of which will be financed by selling government bonds.
The yield on the 10-year Treasury rose 0.29 percentage point to 3.78 per cent, taking its week’s rally to more than 0.6 percentage point – one of its biggest increases on record. The policy-sensitive two-year yield jumped 0.44 percentage points to 3.95 percent. Bond yields rise as their prices fall.
The five-year yield rose 0.54 percentage point, according to Refinitiv data, to 4.1 percent.
The pound fell as much as 2.1 percent against the dollar to a 37-year low of $1.1022. The dollar rose 0.8 percent against a basket of six peers to reach its highest level in 20 years.
Sharp pressure in UK financial markets has spilled over into global asset prices, as concerns intensify over how major central banks will continue to turn the screws on monetary policy as they try to stimulate economic growth.
Futures that track the S&P 500 Index on Wall Street fell 1.2 percent. Those tracking the Nasdaq 100 lost 1.3 percent. US government debt was also hit, with the two-year Treasury yield adding 0.09 percentage points to 4.22 percent.
The US Federal Reserve on Wednesday paved the way for a wave of interest rate increases by other central banks this week, raising borrowing costs by 0.75 percentage points for the third time in a row and raising its target range to 3 to 3.25 percent.
A day later, the Bank of England joined the hawkish trend – raising interest rates by 0.5 percentage point to 2.25 per cent, while the Swiss National Bank moved its lending rate into positive territory for the first time since 2015, at 0.5 per cent.
Rising US interest rates and the looming threat of a recession in the world’s largest economy have prompted Goldman Sachs to cut its year-end forecast for the S&P 500 index to 3,600. This could mean a drop of just under 25 percent for the US stock market over the course of all of 2022 .
David Kostin, equity strategist at Goldman, said the majority of the bank’s clients have taken the view that a “sharp downturn” is inevitable for the US economy and that investors’ focus has been on the timing, size and duration of a potential recession.
Costin said a sharp decline in the US economy could send the S&P 500 index down to 3400 by the end of the year and to 3150 by the end of the first quarter.
Citi’s asset allocation team said the Fed has “fully promised a recession in the US” and investors should not have any hopes of a “Santa Claus” rally for the stock market at the end of the year.