A selloff in the riskier corners of the market deepened as the UK’s plan to lift the economy fueled concerns about heightened inflation that could lead to higher rates, adding to fears of a global recession.
It was a sea of red for equity trading desks around the world, with the rout in the S&P 500 pushing the gauge within striking distance of its June bottom — which stands about 0.5 percent below current levels. The lack of full-blown capitulation may be a sign that the carnage isn’t over yet. Big firms like Goldman Sachs Group Inc. are slashing their targets for stocks, warning that a dramatic upward shift in the outlook for rates will weigh on valuations.
As the risk-off sentiment took hold, Treasuries reversed a slide that earlier sent 10-year yields above 3.8 per cent. The greenback hit a record, sweeping aside other currencies. The euro slid to its weakest since 2002, while the pound touched its lowest in 37 years — with former US Treasury Secretary Lawrence Summers saying that “naive” UK policies may be creating the circumstances for the pound to sink past parity with the dollar.
“It appears that traders and investors are going to throw in the towel this week in what feels like ‘the sky is falling’ type of event,” said Kenny Polcari, chief strategist at SlateStone Wealth. “Once everyone stops saying that they ‘think a recession is coming’ and accepts the fact that it is here already – then the psyche will change.”
Liz Truss’s new UK government delivered the most sweeping tax cuts since 1972 at a time when the Bank of England is struggling to rein in inflation, which is running at almost five times its target. The plunge in gilts means that investors are now betting the central bank boosts its benchmark lending rate by a full point to 3.25 per cent in November, which would be the sharpest increase since 1989.
Read: UK’s Biggest Tax Cuts Since 1972 Trigger Crash in Pound, Bonds
Amid heightened fears over a hard economic landing, commodities took a hit across the board. West Texas Intermediate dropped below US$80 a barrel for the first time since January and was set for a fourth week of declines. Not even gold, which is seen as a haven asset, was able to gain due to a surging dollar.
China’s yuan extended losses to a level closest to the weak end of its allowed trading band since a shock currency devaluation in 2015. With a hawkish Federal Reserve set to sustain the dollar’s global strength, analysts say there’s only so much Beijing could do to shore up its currency at a time of economic difficulties.
The greenback’s strength has been unrelenting and will also exert a “meaningful drag” on corporate earnings — serving as a key headwind for stocks, said David Rosenberg, founder of his namesake research firm.
KKR & Co. sees potential trouble ahead, including a mild recession next year, with the Fed narrowly focused on driving up unemployment to tame inflation. The US labor shortage is so severe that it’s possible the Fed’s tightening doesn’t work, wrote chief macro strategist Henry McVey.
“This is a more draconian outcome than corporate profits falling,” according to McVey, “because it will encourage the Fed to tighten even further.”
Investors are flocking to cash and shunning almost every other asset class as they turn the most pessimistic since the global financial crisis, according to Bank of America Corp. Investor sentiment is “unquestionably” the worst it’s been since the crisis of 2008, with losses in government bonds being the highest since 1920, strategists led by Michael Hartnett wrote in a note.
“It’s a realization that interest rates are going to continue to rise here and that’s going to put pressure on earnings,” said Chris Gaffney, president of world markets at TIAA Bank. “Valuations are still a little high even though they’ve come down, interest rates still have a lot further to go up and what impact that will have on the global economy — are we headed for a sharper recession than the recession everybody expected? I think it’s a combination of all of that, it’s not good news.”
Indeed stocks are still far from being obvious bargains. At the low in June, the S&P 500 was trading at 18 times earnings, a multiple that surpassed trough valuations seen in all previous 11 bear cycles, data compiled by Bloomberg show. In other words, should equities recover from here, this bear-market bottom will have been the most expensive since the 1950s.
Gloomy sentiment is often considered a contrarian indicator for the US stock market, under the belief that extreme pessimism may signal brighter times ahead. But history suggests that equity losses may accelerate even further from here before the current bear market ends, according to Ned Davis Research.
The firm’s Crowd Sentiment Poll has been in an extreme pessimism zone since April 11, or 112 consecutive trading days that mark the third-longest streak of gloom since the data began in 1995. Over the subsequent few months following those periods of extreme pessimistic sentiment, Equity gains were fleeting, with negative median returns three and six months after the 100-day mark.
In another threat to stocks, different iterations of the so-called Fed model, which compares bond yields to stock earnings’ yields, show equities are least appealing relative to corporate bonds and Treasuries since 2009 and early 2010, respectively. This signal is getting attention among investors, who can now know to look to other markets for similar or better returns.
The S&P 500’s plunge since the August peak solidifies the downtrend channel in place since the bull-market apex in early January, according to Gina Martin Adams at Bloomberg Intelligence. “The breakdown beneath 3,900 support leaves little for the index to grasp on its way to testing the June lows,” she wrote.
Here are some of the main moves in markets:
- The S&P 500 fell 1.9 per cent as of 11:04 am New York time.
- The Nasdaq 100 fell 1.7 percent
- The Dow Jones Industrial Average fell 1.5 percent
- The Stoxx Europe 600 fell 2.3 per cent
- The MSCI World index fell 2.1 percent
- The Bloomberg Dollar Spot Index rose 1.1 percent
- The euro fell 1.3 percent to US$0.9710
- The British pound fell 3.1 percent to US$1.0915
- The Japanese yen fell 0.6 percent to 143.20 per dollar
- Bitcoin fell 3.3 percent to US$18,606.9
- Ether fell 3.5 percent to US$1,278.6
- The yield on 10-year Treasuries was little changed at 3.71 percent
- Germany’s 10-year yield advanced four basis points to 2.01 percent
- Britain’s 10-year yield advanced 28 basis points to 3.78 percent
- West Texas Intermediate crude fell 5.8 percent to US$78.66 a barrel
- Gold futures fell 1.7 percent to US$1,652.70 an ounce