HONG KONG – The euro was at a two-decade low, stocks languished and German bond yields hit an eight-week high on Wednesday as investor sentiment soured under the weight of high energy prices, a batch of poor global economic data, and more inflation fears.
Renewed concerns central banks will keep hiking interest rates aggressively to tame red hot inflation were also high on investors’ minds ahead of the closely-watched Jackson Hole central banking symposium which begins on Thursday.
The European common currency tumbled 0.4% against the dollar to $0.9925, trading just above its 20 year intraday low hit a day earlier. Sterling suffered too, losing 0.52%.
The risk-off mood could also be seen in share markets where the MSCI world equity index, dipped 0.2% to a three week low.
Britain’s FTSE100 shed 0.5%, though gains from defensive stocks helped the pan-European stocks index STOXX 600 to advance 0.2% after touching a four-week low in early trade.
Moves were due to “the combination of the Fed and other central banks sticking with their inflation mandate, and at the same time the latest economic indicators showing signs of weakness not just in Europe, but also in the U.S. and Japan,” said Tai Hui, chief market strategist for Asia at JPMorgan Asset Management.
Wednesday is fairly quiet on the data front, but poor economic activity reports the previous day from the euro zone – which reported a contraction for a second straight month – the United States and Japan, continued to hurt appetite for riskier assets, such as stocks.
Energy prices are also a factor, with Dutch gas contracts, the benchmark for Europe, regaining previous day’s losses and trading near their five-and-a-half month high hit on Monday.
Energy costs are a major driver of inflation, and expectations the European Central Bank will step up its rate hikes to bring it under control helped push Germany’s 10-year government bond yield, the benchmark for the block, to a fresh eight-week high of 1.38%.
Markets are also now repricing their expectations for Federal Reserve rate hikes after speculation their pace could slow boosted stocks early in the month.
“Maybe two or three weeks ago, markets were thinking the Fed may be done with hiking rates by the end of this year and cutting rates in 2023, and that sequence of events now doesn’t look like it’s happening,” Hui said.
That shift had pushed the yield on U.S. benchmark 10 year treasuries back above 3% early in this week, he added. It was last 3.0573%.
Traders have been raising their expectations on where the Fed funds rate might peak, with current pricing pointing toward around 3.7% in the middle of 2023.
China provided another reason for concern about the global economy, with a slide in property stocks serving as another reminder of the deep hole that developers are in without access to easy credit. An index of Hong Kong listed builders fell to a 10-year low.
“People are still trying to understand the full extent of the detrimental effects as it has multiple repercussions,” said Samuel Siew, a market specialist at CGS-CIMB in Singapore.
“It’s still very hard to actually measure the entire severity of the situation. That is what markets are trying to decipher, and whether ongoing support is sufficient.”
Oil recovered from early losses. Brent crude futures rose 0.9% to $101.1 a barrel – still affected by talk of Saudi supply cuts. U.S. crude futures gained 1% to $94.75.
Spot gold held steady at $1,747 an ounce. Bitcoin still bore the scars from a sudden slide at the end of last week, parked at $21,300.
(Reporting by Alun John in Hong Kong and Tom Westbrook in Singapore, Editing by Ana Nicolaci da Costa, Jamie Freed and Tomasz Janowski)