Asian stock markets fell on Wednesday as rising borrowing prices heightened concerns about a worldwide recession, sending investors running for the safe-haven greenback and hurting the region’s currencies.
The yield on 10-year Treasuries in the United States was pushed above 4.0% for the very first time since 2010 as investors speculated that the Federal Reserve may need to raise interest rates to above 4.5% in its fight against inflation.
Moody’s cautioned that unfunded UK tax breaks would be “damaging” for the nation’s credit position, intensifying a devastating selloff in gilts. This put more pressure on the pound.
According to Jennifer McKeown, director of global economics at Capital Economics, it is clearly certain that central banks in advanced nations will make the current reflation trade the most forceful in three decades.
Although this could be required to control inflation, it will cost a lot of money.
They are now referring to the upcoming year as a worldwide recession because it is likely to feel like one, look like one, and possibly even quack like one, Mckeown said.
Rising rates and slowing growth are bad for stocks, and MSCI’s largest index of Asia-Pacific shares outside of Japan (.MIAPJ0000PUS) dropped 2.0% to reach its lowest level since April 2020 as a result.
South Korean equities (.KS11) dropped 2.9% to a two-year low, while Japan’s Nikkei (.N225) lost 2.2%. Blue-chip Chinese stocks fell 1.2%.
S&P 500 futures fell 0.6% and Nasdaq futures fell 0.9% as a result of the gloomy sentiment. The theoretically significant 200-week average of around 3,590 would be in danger since it would be the S&P 500’s ninth session of losses.
FTSE futures and EUROSTOXX 50 futures both dropped 1.1% as European borrowing prices surged.
Despite continuing high inflation, European sovereign rates have risen to multi-year highs due to worries about UK strategy and an Italian political move to the right, was written by JPMorgan analysts in a note.
The Italian 10-year gap to the German Bund has surpassed 250 bps, which is significantly higher than the 200 bps threshold they believe the ECB finds unsettling.
The decline in the value of the pound and UK bonds has shaken investor confidence and could push some fund managers to trade other assets to make up losses.
The Bank of England’s top economist highlighted the possibility of more interest rate increases by stating that the tax cuts would probably necessitate a “major policy reaction.”
On Tuesday, Moody’s issued a warning to the UK government, stating that sizable unfunded tax cuts are “credit negative” and may jeopardise the credibility of the government’s finances.
Investors now demanded more to finance the nation’s deficits, according to George Saravelos, head of global of FX strategy at the Deutsche Bank Research, including a 200-basis-point rate increase by November and a terminal rate upwards at 6%.
Saravelos added this is the amount of risk premium that the markets now require to stabilise the currency. It should be noted that failure to deliver on this could result in a vicious cycle of currency depreciation, imported inflation, and tightening.
Once again under attack, the pound fell to $1.0656 after its recovery from Monday’s record low of $1.0327 was well short of the $1.1300 mark reached before the UK Budget last week.
The yield on British 10-year gilts has increased by an astounding 119 percentage points in just four sessions, reaching 4.50%. This is the biggest increase in yield since at least 1979.
A decline in sterling has greatly benefited the safe-haven dollar, which has increased to a new 20-year high of 114.680 against a range of currencies.
The dollar maintained at 144.70 yen, putting the Japanese government’s commitment to defend the 145.00 level following last week’s intervention to the test.