Stocks fall as investors’ ‘higher long-term’ interest rate expectations shake

  • Treasury yields rise to 4.50%, and the dollar gains
  • Chinese stocks decline amid real estate concerns and caution ahead of the holiday
  • Investors are weighing expectations ahead of US inflation numbers

LONDON (Reuters) – Global stocks fell on Monday, extending last week’s decline as central banks reiterated the message that interest rates will remain high for longer, while investors braced for risky U.S. inflation data on Friday.

Last week brought a mixed bag for investors.

On the one hand, the likes of the European Central Bank and the Bank of England have indicated that they may not raise interest rates again. On the other hand, the Federal Reserve kept interest rates unchanged, but its Chairman Jerome Powell made it very clear that the soft landing that many investors were counting on was not the base scenario.

The MSCI World Index (.MIWD00000PUS), which is on track for its worst monthly performance of the year, with a 3.6% decline, fell 0.2% on the day.

US 10-year Treasury yields rose to 4.5% for the first time since October 2007, and on Monday rose 5 basis points to 4.491%, heading for their biggest monthly rise in a year, reflecting investor anxiety about the economic outlook.

“It’s not about the fact that the 10-year bond yield is over 4.5% – whatever the number is, you get this feeling in the market that the pain threshold is approaching,” said Frederic Ducrozet, head of macroeconomic research at the Bank of England. “That’s the story.” Pictet Wealth Management.

Ducrozet said investors have so far been pleasantly surprised by how well stock market performance and valuations have held up, especially in the technology sector, and how resilient the U.S. economy has shown in the face of nearly two years of rising interest rates.

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He added that cracks are starting to appear, with oil prices heading toward $100 a barrel, and stocks outside the technology sector struggling to make significant upward progress.

“All of this is happening at a time when this flexibility is coming to an end. We were already expecting significant weakness to materialize in the US economy – it has already happened in Europe – and on top of that, we have a combination of shocks coming,” Powell added last week.

An autoworkers strike, a potential government shutdown, the resumption of student loan payments, higher energy prices and higher long-term borrowing costs are among the risks Powell pointed to in a news conference last week.

S&P 500 and Nasdaq 100 futures fell 0.1%, erasing gains made earlier after the Hollywood Writers Guild reached a preliminary working agreement with major studios.

Fragile China

China’s sluggish economy adds another layer of caution for investors.

Rating agency Standard & Poor’s on Monday lowered its Chinese growth forecast to 4.8% in 2023 from 5.2%, and to 4.4% in 2024 from 4.8%, and said fiscal and monetary stimulus was limited so far.

Chinese stocks (.CSI300) fell after rebounding on Friday, driven by concerns about the real estate market. On Sunday, troubled developer Evergrande said it was unable to issue new debt due to an ongoing investigation into its main Chinese subsidiary.

The week-long national holiday, which begins on Friday, led to tense transactions.

The dollar index was supported by rising Treasury yields, rising 0.1% on the day. It posted a 10th straight week of gains last week, its longest stretch since 2014, as investors rushed to offload bets on a Federal Reserve interest rate cut next year.

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“What has prompted the move this year is the acceptance that the inflation shock is not transitory, but will require tight monetary policy for a much longer period than we initially thought,” said Andrew Lilley, chief interest rate strategist at Barenjoy.

Much will depend on US data. US business activity was essentially at a standstill in September, with the primarily services sector slowing at its slowest pace since February.

The Fed’s preferred measure of inflation, the core personal consumption expenditures price index, is due on Friday and could help shape expectations for the Fed’s November meeting.

In currency markets, the yen hovered near $150 per dollar, a level that many traders believe could represent a line in the sand against Bank of Japan intervention. Last week, the Bank of Japan maintained its ultra-loose monetary policy.

Governor Kazuo Ueda, in a speech on Monday, reiterated the central bank’s resolve on interest rates and said there was “very much uncertainty” about whether companies would continue to raise prices and wages.

In the latest trading, the yen recorded 148.625 yen to the dollar, slightly higher than the lowest level in ten months of 148.660 that it recorded earlier.

Oil prices rose on Monday, approaching their highest levels in 10 months. Brent crude futures rose 0.2% to $93.48 per barrel, while West Texas Intermediate crude rose 0.1% to $90.16.

Reported by Stella Q. Edited by Himani Sarkar, Jacqueline Wong, Miral Fahmy, and Mark Heinrich

Our standards: Thomson Reuters Trust Principles.

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