© Reuters. FILE PHOTO: A man wearing a protective mask amid the outbreak of the coronavirus disease (COVID-19) walks past an electronic board displaying the Shanghai Composite Index, the Nikkei Index and the Dow Jones Industrial Average outside a brokerage in Tokyo, Japan, March 7.
Written by Tommy Wilkes
LONDON (Reuters) – Stocks fell again on Monday and the dollar rose to a new two-decade high as concerns about rising interest rates and a tightening lockdown in Shanghai deepened investor fears that the global economy was heading for a slowdown.
After a busy session on Friday in which US stocks sold off sharply as another rise in US Treasury yields worried investors, markets braced for a choppy start to the week, with most indicators in the red.
Central banks in the United States, Britain and Australia raised interest rates last week, and investors are preparing for further tightening as policymakers try to beat high inflation.
There was a lot for investors to worry about on Monday apart from tightening financial conditions.
No complacency was shown in China’s no-spreading coronavirus policy, as Shanghai tightened citywide lockdown for 25 million residents.
Speculation that Russian President Vladimir Putin may declare war on Ukraine in order to call up the reserves during his D-Day speech also hurt market sentiment. Putin has so far described Russia’s actions in Ukraine as a “special military operation,” not a war.
Despite the sharp rise in interest rates, not all investors believe a slowdown is imminent.
“We continue to believe that investors should take a stance on the reality of inflation now, rather than the chance of a recession soon,” said strategists at UBS Global Wealth Management.
Wall Street headed to another weaker open with stock futures down 1%, while Nasdaq futures fell 0.9%. US 10-year bond yields reached a new 3-1/2-year high at 3.179%.
The Euro STOXX Index slipped 0.56%, while losing 0.21%.
MSCI’s main emerging market stock index fell to its lowest level since July 2020.
It fell 0.5%, leaving it not far from the 17-month low hit on Friday.
MSCI’s broadest index of Asia Pacific shares outside Japan was down 1.27% and 2.53%. Chinese blue chips slid 0.8%, while the offshore yuan fell to 6.765 per dollar, another 18-month low.
Investors are also nervous ahead of the US consumer price report due on Wednesday. Only a slight drop in inflation is expected, and certainly nothing to prevent the Fed from rising at least 50 basis points in June.
Core prices saw a 0.4% increase in April, accelerating the monthly rate from 0.3% the previous month, even as the annual pace eased slightly due to fundamental effects.
dollar hegemony
With investors toying with so many fears, one place they look for safety is the dollar, which is rising against most other currencies.
The euro, which measures the US currency against a basket of currencies, rose 0.4% to 104.19, the latest in a string of 20-year highs.
“Risk sentiment is fragile and yield differentials continue to point to further upside in the dollar index,” said Sean Callow, chief FX analyst at Westpac.
“We are looking for continued demand for DXY (Dollar Index) on dips, with 104 already under investigation and still likely to head towards 107 multiple weeks.
The rise of the dollar hits other currencies. The euro fell back below $1.05 while the Japanese yen fell to its lowest level since 2002.
Expectations that the Fed will move more aggressively in raising interest rates support the dollar, as among investors that the US economy will hold out better than the eurozone, which has been hit hard by the fallout from the war in Ukraine.
But interest rates are also rising in the Eurozone. On Monday, the yield on German 10-year bonds hit a new high since 2014, buoyed by hawkish policy maker Robert Holzmann who said on Saturday that the European Central Bank should raise interest rates three times this year to combat inflation.
The notes are packed with Federal speakers this week, giving them plenty of opportunity to keep up with the hawks’ chorus.
Oil prices plummeted after the Group of Seven nations committed on Sunday to ban or halt imports of Russian oil over time.
It was recently quoted 1.07% lower at $111.21 while it was down 1.16% at $108.51.
Gold fell 0.7% to $1,869 an ounce, having recently struggled to gain any momentum as a safe haven.
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