Global equities slumped on Monday with Treasury yields spiking on concerns that last week's higher than forecast inflation reading will force the Fed to tighten aggressively and plunge the U.S. economy into a recession.
A brutal day of selling brought the S&P500 down more than 20% from its record highs, the common definition of a bear market. The benchmark index slid -3.88% on Monday with all sectors negative led by energy -5.13%, real estate -4.78%, and consumer discretionary -4.66% with 99% of stocks lower. The Dow Jones also declined -2.79%, as did the Nasdaq Composite -4.68% and Russell 2000 -4.76% with the VIX surging +22.59%.
Treasury yields spiked across the curve with the 2-year climbing +29.7 basis points to 3.36%, as did both the 10 and 30-year rates by +20.2 and +15.7 basis points respectively. While Jerome Powell has previously said rates did not need to be raised by as much as 0.75% at any one meeting, the probability of such a hike on Wednesday’s meeting now sits at 43% up from 4% on Thursday with several investment banks also calling for such a hike. There is a decent argument for such as move, especially given the market expected three consecutive +0.5% rate increases although a counterargument could also be made that forward guidance remains an effective policy tool and the impact of quantitative tightening is yet to be felt. The U.S. dollar index rose +1.04% to 105.23 while the 2-10 yield spread declined -8.9 basis points to just 0.009% signaling heightened concerns of a recession.
European shares were also sharply lower weighed by the same sentiment globally with the Euro Stoxx 600 down -2.41% along with the DAX -2.43%, CAC -2.67% and FTSE100 -1.53% with benchmarks across the region falling. Also adding to concerns were reports of Beijing racing to contain a COVID-19 outbreak, with millions facing mandatory testing and some targeted lockdowns after restrictions were recently relaxed. European bond markets echoed moves in the U.S. with 10-year yields spiking between +2.2 basis points in Sweden to as much as +26 basis points in Italy, the Euro declined -1.05% to 1.0409 and the Pound was -1.47% weaker at 1.2134.
*Note: These prices are based on futures and/or CFD pricing and may therefore differ slightly from spot pricing.
The ASX is set to open over -4% lower this morning with ASX200 futures down -4.27% or -296 points to 6,632 when compared with prices on Friday. The Australian dollar is -1.91% weaker overnight at 0.6923 while bond markets were closed on Monday for a public holiday, although we should expect to see similar moves to overseas markets today.
Oil prices edged higher with both WTI and Brent crude +0.22% and +0.18% higher at US$120.93 and US$122.23 a barrel. Iron ore futures in Singapore declined -3.66% on Monday and a further -0.54% weaker in early trade this morning at US$133.85. Gold fell -2.80% on Monday to US$1,819.26 an oz, with silver also -3.71% lower at US$21.08 and Bitcoin slumped -15.13% to US$23,209.
Economic data:
- German Inflation (YoY May) 16:00
- U.K. Employment (MoM Apr) 16:00
- Eurozone Economic Sentiment (MoM Jun) 19:00
- U.S. Producer Prices (MoM May) 22:30
This article was written by James Woods, Portfolio Manager, Rivkin Securities Pty Ltd. Enquiries can be made via info@rivkin.com.au or by phoning +612 8302 3632.
