NEW YORK, Sept 2 ― September kicked off on a stormy note yesterday, as persistent worries about rising global interest rates and recessions hounded stocks, bonds and oil prices, and vaulted the US dollar to a 24-year high against the yen.
Indeed, data released early yesterday that showed US manufacturing grew steadily in August, as employment and new orders rebounded, was not welcomed by investors, who worried a strong economy strengthens the case for the Federal Reserve to keep raising interest rates in the next few months.
Investors fear that continued monetary policy tightening by central banks in the United States and Europe would scupper the two regional economies, and trigger a recession.
“The US data this week has suggested the Fed still has a lot of work to do to reduce demand sufficiently to bring inflation down,” analysts at ANZ Bank said in a note to clients.
All eyes are now on US August nonfarm payroll data due today. Analysts expect 285,000 jobs were added last month, while unemployment hovered at 3.5 per cent. Investors may not like a strong number if it supports the basis for a continuation of aggressive rate hikes, which could further boost the US dollar.
After dropping over a per cent earlier in the day, US stocks reversed by the end of the session to eke out modest gains. The US S&P 500 index climbed 0.3 per cent, the Dow Jones Industrial Average rose 0.5 per cent, while the Nasdaq Composite finished down 0.3 per cent.
Europe's STOXX share index of 600 companies slid 1.8 per cent, and MSCI's main world stocks index lost 0.8 per cent to stand at its lowest since mid-July, while Europe's government bond markets saw more selling after their worst monthly rout in decades.
The bearishness was being fed by the possibility that the European Central Bank will raise its policy rate by a record 75 basis points next week, following Wednesday's record high inflation reading.
Heavy shelling at Ukraine's giant Zaporizhzhia nuclear plant rattled nerves, too. Russia had shut its main gas pipe to Europe for maintenance, Washington ordered Nvidia Corp to stop selling high-tech chips to China, while veteran investor Jeremy Grantham warned of an “epic finale” to the stock market “superbubble” inflated by years of cheap money.
“The whole world is now fixated on the growth-reducing implications of inflation, rates, and wartime issues such as the energy squeeze,” Grantham said.
Add to that Covid-19 in China, food and energy crises, demographics and climate change and “the outlook is far grimmer than could have been foreseen,” he added.
The dive for safety saw the dollar advance to a new 24-year high of ¥140.21 in currency markets as investors braced for higher US rates, while expecting anchored Japanese rates to go nowhere anytime soon.
The euro tumbled 1 per cent against a surging dollar to US$0.99435 (RM4.43), sterling fell 0.7 per cent to US$1.15385, while the risk-sensitive Australian and New Zealand dollars drooped to their lowest levels since July.
Hawkish Fed expectations saw Treasury yields hit fresh highs. The yield on benchmark two-year notes jumped to 3.5510 per cent to the highest since late 2007, while the yield on 10-year bonds rose to a high of 3.2970 per cent.
Bets on a bumper ECB move next week were gaining traction, too. Euro zone money markets were now pricing in a roughly 80 per cent chance of an unprecedented 75 basis point hike, up from 50 per cent earlier in the week.
Benchmark German Bund yields, which are a key driver of borrowing costs, went above 1.63 per cent before pulling back to 1.57 per cent. Italy's 10-year bond yield climbed to its highest since mid-June at 4 per cent at one point, and the closely watched gap between German and Italian bond yields expanded to its widest since late July.
“The ECB's September 8th meeting is still a close call, but this latest data will likely be enough to tip even the centrist members towards a 75 basis point hike,” Mizuho analysts said.
Overnight, Cleveland Fed President Loretta Mester said the US central bank would need to boost interest rates somewhat above 4 per cent by early next year, and hold them there in order to bring inflation back down to the Fed's goal. She also warned that the risks of recession over the next year or two had moved up.
Credit rating agencies were dishing out warnings as well. Moody's slashed its forecast for the world's top 20 economies to 2.5 per cent growth from 3.1 per cent, while Fitch acknowledged the euro zone was now set for recession.
“A full shutoff of Russian pipeline gas to the EU increasingly looks like a reasonable assumption,” Fitch's Brian Coulton said, adding that the hit to growth already seen meant a recession was clearly starting.
Asian stocks slid overnight as well as investors there also sold everything risky that was not nailed down.
Japan's Nikkei skidded 1.5 per cent and Hong Kong's Hang Seng index fell 1.8 per cent, while Chinese blue-chips ended down 0.9 per cent, having been anchored earlier in the session by hopes for more economic stimulus from Beijing.
Regional purchasing managers' indexes from South Korea, Japan and China yesterday had all pointed to slowing global economic activity as rising interest rates, high inflation, the war in Ukraine and China's Covid curbs took a heavy toll.
“August has been a terrible month for balance fund investors with no diversification gains from holding a portfolio of equities and bonds,” Rodrigo Catril, senior FX strategist at National Australia Bank, said in a note to clients.
“Month end yields no surprises, but rather an extension of the major themes seen during August with further increases in core global bond yields and weaker equities.”
In the main commodity markets, Brent crude declined 3.9 per cent to US$91.95 per barrel, as reports of new Covid-19 lockdown measures in China added to concerns about softening demand.
US crude fell 3.7 per cent to US$86.27 a barrel, although European gas prices did provide some relief as they fell back 4 per cent as markets got used to Russia's supply cut.
Gold fell 0.9 per cent to US$1,695.0219 an ounce, but industrial metals all took a heavy pounding with tin down 8 per cent, zinc down 5.3 per cent and copper down 1.75 per cent. ― Reuters