US stocks closed in a bear market on Monday after a dramatic late-session sell-off, while government bond yields soared, with investors unnerved over stubbornly high inflation and the prospect of aggressive monetary tightening by central banks.
Wall Street’s equities benchmark S&P 500 slid 3.9 per cent in New York to close at its lowest level since January 2021. The move left the index more than 20 per cent below its January 2022 all-time high, a decline commonly identified as a bear market.
Government bond prices on both sides of the Atlantic also dropped, sending yields to the highest levels in more than a decade, as strong inflation readings drive central banks in the US and Europe to raise interest rates after years of relaxed policy.
The heavy selling was triggered by unexpectedly high inflation figures released this past Friday, which showed US consumer prices rose 8.6 per cent year on year in May as Russia’s invasion of Ukraine raised fuel and food costs.
Analysts have upgraded their forecasts of how far the Federal Reserve will raise interest rates at its monetary policy meeting which concludes on Wednesday, with increasing speculation that the central bank might implement an extra large 0.75 percentage point increase.
Futures markets now show investors expect the federal funds rate to hit 3.6 per cent by the end of the year, compared with the current range of 0.75 to 1 per cent. A week ago, investors had only expected the rate to reach 2.9 per cent this year.
“I think with this latest [inflation] number, the Fed is really going to go for it and this will cause an economic slowdown,” said Julian Howard, lead investment director for multi-asset solutions at fund manager GAM. “It’s all looking pretty ugly in the short term and there is nowhere really to escape from it, apart from going into cash for now.”
Expectations of higher interest rates have had an especially pronounced effect on more speculative corners of the market including fast-growing tech companies and crypto assets. The tech-heavy Nasdaq Composite closed down 4.7 per cent, taking its losses for the year to 31 per cent.
Bitcoin, the most widely held cryptocurrency, traded at less than $24,000, having tumbled 20 per cent since last Friday. The decline was exacerbated by news that two big players in the crypto market had halted customer withdrawals due to the extreme market conditions.
The yield on the benchmark 10-year Treasury note, which underpins global borrowing costs, rose 0.21 percentage points to 3.36 per cent, its highest level since 2011. Yields rise when prices fall, and Monday’s shift represented the sharpest one-day sell-off in benchmark US debt since March 2020.
The two-year Treasury yield, which tracks shorter-term interest rate expectations, rose 0.27 percentage points to 3.33 per cent, its biggest one-day rise since June 2009.
US investment bank Goldman Sachs on Monday raised its Fed policy forecasts to include 0.5 percentage point increases this week and again in July, September and November, with further quarter-point rises in December and January.
“There is very little chance of the Fed pivoting to support financial markets until there is a trend of very meaningful economic disappointments,” said Seema Shah, chief strategist at Principal Global Investors.
Analysts at Barclays predicted a 0.75 percentage point increase this week. Standard Chartered strategists said, in a research note, that they would “not preclude” this outcome.
In Europe, the Stoxx 600 share index dropped 2.4 per cent, its fifth straight session of falls. The regional share gauge has dropped more than 9 per cent this quarter.
The yield on Germany’s 10-year Bund rose 0.12 percentage points to 1.63 per cent, while Italy’s 10-year bond yield rose 0.26 percentage points, hitting 4 per cent for the first time since 2014. The yield on Italy’s benchmark debt has more than quadrupled since mid-December. The European Central Bank last week paved the way for its first interest rate rise in more than a decade.
The dollar index, which tracks the US currency against a basket of peers and which tends to climb in times of uncertainty, rose 1.1 per cent. Sterling fell particularly sharply, down 1.5 per cent against the dollar to $1.21.
Economists expect the Bank of England to lift its main borrowing rate by 0.25 percentage points on Thursday, with an increasing chance of a 0.5 percentage point rise, escalating fears of stagflation.
Elsewhere, the yen set a new 24-year low of ¥135.19 per dollar as traders bet on the Bank of Japan continuing to defy the global trend towards higher interest rates. A FTSE index of Asian shares outside Japan fell 2.8 per cent.
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