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Investors dump shares on growth fears as Swiss, UK hike rates

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© Reuters. People wearing protective masks, amid the coronavirus disease (COVID-19) outbreak, are reflected on an electronic board displaying Japan’s stock prices outside a brokerage in Tokyo, Japan, October 5, 2021. REUTERS/Kim Kyung-Hoon
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By Koh Gui Qing and Danilo Masoni

NEW YORK (Reuters) -World stocks resumed their slide on Thursday and government bonds hovered at multi-year highs after a series of rate rises from global central banks rekindled fears that aggressive policy tightening could drag economies into recession.

Following a relief rally on Wednesday when investors cheered the Federal Reserve’s aggressive move to raise rates by 75 basis points – its biggest rate hike since 1994 – by scooping up shares, two other spates of policy tightening in Britain and Switzerland seemed to have sobered investors into refocusing on the chance that economies could slow as rates rise.

“Can the economy take it? So far, leading indicators show good readings, but we remain wary of a consumer strike,” said Giuseppe Sette, president of the quantitative research firm Toggle.

By late morning, MSCI’s gauge of stocks across the globe had slumped 2.06%.

In New York, the Dow Jones Industrial Average dropped 2.09%, the S&P 500 fell 2.76% and the Nasdaq Composite tumbled 3.47%.

The dollar, which has benefited from rising U.S. yields, flagged on Thursday, weighed in part by the Swiss franc, which surged after the Swiss National Bank surprised investors earlier in the day by raising interest rates for the first time in 15 years by 50 basis points.

The Bank of England also lifted rates on Thursday for a fifth time since December by 25 basis points, a day after the European Central Bank promised support to temper a bond market rout fueled by hawkish expectations.

By 1437 GMT (1037 EDT), the Swiss franc had soared 2.6%, its biggest one-day gain in seven years. A stronger Swiss franc weighed on the dollar index, which sagged 0.42% to 104.33, pulling back from a 20-year high of 105.79 hit on Wednesday. [USD/]

“There’s a lot of nervousness. After the initial relief to the Fed … markets seem to have woken up that it is still a 75 basis point rate hike,” said Giuseppe Sersale, strategist and portfolio manager at Anthilia in Milan.

“If even the Swiss central bank surprisingly raises by half a point, clearly investors imagine that the tightening of central banks is still very violent. There is very little to be cheerful about,” Sersale added.

Swiss stocks were close to confirming a bear market pattern, and the UK’s top FTSE 100 equity benchmark slumped 2.95% as sterling plunged following the BoE’s rate hike, which confounded some forecasts of a bigger move.

“Once again the BoE looks like the timid cat next to the Fed’s roar against inflation. … A 6-3 vote on 25 bps means that the sterling bulls will have little to back up any attempt to push the pound higher against the dollar,” said Chris Beauchamp, chief market analyst at IG Group in London.

EYE-CATCHING

The Fed’s rate rise on Wednesday was accompanied by projections that showed U.S. economic growth slowing to a below-trend rate of 1.7%, and policymakers expect to cut interest rates in 2024.

Data on Friday showed a sharper-than-expected rise in U.S. inflation in May, alongside a University of Michigan survey showing consumers’ five-year inflation expectations jumping sharply to their highest since June 2008.

In a news conference following the Fed’s latest two-day policy meeting, Fed Chair Jerome Powell said that the survey was “quite eye-catching.”

Inflation expectations “are starting to look like they’re too high. That I think is one reason why Powell wanted to do a 75. … And I think they will also go again in July,” said Joseph Capurso, head of international economics at Commonwealth Bank of Australia. “They’ve got to get inflation down. They’re so far behind the curve it’s not funny.”

MSCI’s broadest index of Asia-Pacific shares outside Japan fell 1.1%, erasing earlier gains.

The SNB hike helped put fresh pressure on European bond prices as investors ramped up bets for ECB rate hikes. Germany’s 10-year yield, the benchmark for the bloc, rose as much as 26 basis points at one point.

U.S. 10-year Treasury yields hit a high of 3.495% before pulling back to 3.364%.

U.S. crude recently fell 0.4% to $114.85 per barrel and Brent was at $117.68, down 0.7% on the day.[O/R]

Gold was lower as rising interest rates dented the appeal of non-yielding bullion. Spot gold dropped 0.2% to $1,829.60 an ounce. [GOL/]

Shares resume slide on growth fears as Swiss, UK hike rates

Analysis-Bank of England keeping its options open for future rate hikes

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