Asian markets tumble, dollar strengthens on recession fears

Euro Stoxx 50 futures fell 1.0%, while FTSE futures lost 1.1% as European borrowing costs blew out.

“European sovereign yields have soared to multiyear highs amid concerns about UK policymaking and a rightward shift of Italian politics in the midst of still-elevated inflation,” wrote analysts at JPMorgan in a note.

“The Italian 10-year spread to the German Bund has eclipsed 250 basis points (bps), well above the 200 bps mark we believe makes the ECB uncomfortable.”

Shaking investor confidence has been the collapse in sterling and UK bond prices, which could force some fund managers to sell other assets to cover resulting losses.

Underlining the risk of yet higher interest rates, the chief economist at the Bank of England (BOE) said the tax cuts would likely require a “significant policy response”.

Moody’s on Tuesday warned the UK government that large unfunded tax cuts were “credit negative” and could undermine the government’s fiscal credibility.

More risk premium, please

George Saravelos, global head of FX strategy at Deutsche Bank Research, said investors now wanted more to finance the country’s deficits, including a 200 bps rate hike by November and a terminal rate up at 6%.

“This is the level of risk premium that the market now demands to stabilise the currency,” said Saravelos. “If this isn’t delivered, it risks further currency weakening, further imported inflation and further tightening — a vicious cycle.”

Sterling was under fire again at $1.0644, with its bounce from Monday’s record trough of $1.0327 stopping far short of the $1.1300 level held before last week’s UK budget.

Yields on British 10-year gilts have risen a staggering 119 bps in just four sessions to reach 4.50%, the sharpest such move since at least 1979.

The safe-haven dollar has been a major beneficiary from the rout in sterling, rising to a fresh 20-year peak of 114.680 against a basket of currencies.

The dollar held at 144.75 yen, testing the resolve of the Japanese authorities to protect the 145.00 level after last week’s intervention.

The euro slipped anew to $0.9552 and back towards last week’s two-decade low of $0.9528.

The dollar also touched a record high on the offshore-traded Chinese yuan at 7.2387, having risen for eight straight sessions.

The mounting pressure on emerging-market currencies from the dollar’s rise is, in turn, adding to risks that those countries will have to keep lifting interest rates and undermine growth.

The ascent of the dollar and bond yields has also been a drag for gold, which was hovering at $1,624 an ounce after hitting lows not seen since April 2020.

Oil prices fell again as demand worries and the strong dollar offset support from US production cuts caused by Hurricane Ian.

Brent fell $1.17 to $85.03 a barrel, while US crude lost $1.10 to $77.40 per barrel.

Reuters