London/Sydney — Stocks hit two-year lows on Friday and bonds faced an eighth weekly loss, as investors digested the prospect of a far more aggressive rise in US interest rates, while currency markets remained volatile after Japan’s intervention to prop up the yen.
Interest rates rose sharply this week in the US, Britain, Sweden, Switzerland and Norway — among other places — but it was the Federal Reserve’s signal that it expects high US rates to last through 2023 that set off the latest sell-off.
MSCI’s world stocks index fell to its lowest since mid-2020 on Friday, having lost about 12% in the month or so since Fed chair Jerome Powell made clear that bringing down inflation would hurt.
The euro fell for a fourth straight day after data showed the downturn in the German economy has worsened in September, as consumers and businesses face an unprecedented energy crunch and spiralling inflation.
A sea of red
European stocks were a sea of red for a second day, under pressure from losses in everything from bank stocks to natural resources and technology shares.
The pan-regional Stoxx 600 was down about 0.5% in early trade, while Frankfurt’s DAX lost 0.6%, ranking it as one of Europe’s worst-performing indices. London’s FTSE lost 0.1%, against a backdrop of the pound tumbling to another 37-year low.
“Pretty much anything besides inflation data and central-bank policy decisions is just noise at the moment, with the market firmly, and almost solely, focused on how high rates will rise across developed markets, and how long they will remain at those peaks,” CaxtonFX chief strategist Michael Brown said.
“The Fed’s message on Wednesday was clear, that rates are going higher than the market was pricing, and policy will remain restrictive for a prolonged time to come, likely throughout 2023 — in that environment, it’s almost impossible to be long stocks, or to want to buy treasuries, hence the sell-off in both is no surprise, and should continue.”