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Global stocks dropped toward the lowest levels of the month yesterday and sovereign bonds nursed losses as worries about tightening Federal Reserve monetary policy filtered across markets.
An Asia-Pacific share index shed 1 percent, while S&P 500, Nasdaq 100 and European equity futures retreated. Energy stocks were among the few to make gains thanks to a boost for crude oil from the possibility of OPEC+ output cuts.
The Fed’s brake on the US economy to ensure high inflation keeps cooling remains the key driver in global markets. Traders are bracing for hawkish talk at the central bank’s Jackson Hole symposium later this week.
Treasuries pared some of a Monday selloff, leaving the 10-year yield at 3 percent. Australian and New Zealand bonds fell. A dollar gauge was firm and the euro was near a two-decade low.
Doubts are creeping in about bets that the Fed will temper monetary-policy tightening, expectations that had helped to lift investor sentiment.
For instance, hedge funds in a key part of the derivatives market have made record wagers that the US central bank will stick to a hawkish script.
The Fed’s “incentives are to communicate that rate hikes will remain the norm for the balance of the year” even if eventually the pace will slow, Benjamin Jeffery and Ian Lyngen, strategists at BMO Capital Markets, wrote in a note.
Hedge funds collectively placed a big short across futures referencing the official successor to the London interbank offered rate known as the Secured Overnight Financing Rate. This position stands to benefit should Fed Chair Jerome Powell effectively rule out a dovish pivot at Jackson Hole.
The Fed is walking a tightrope in trying to contain price pressures while averting recession. At the same time, global growth risks are very evident, spanning Europe’s energy crisis to China’s property and Covid troubles.
With total debt in the US at more than US$30 trillion, a 1 percent increase in rates leads to a “huge” climb of more than US$300 billion in interest payments, Tracy Chen, portfolio manager at Brandywine Global Investment Management, said on Bloomberg Television.
“How high can the Fed technically hike their interest rate? Is a 4 percent-5 percent fed funds rate realistic?” she said, underlying the sobering challenge that lies ahead.
Elsewhere, Bitcoin wavered and is over US$2 000 off levels that prevailed before a crypto swoon on August 19. – Bloomberg
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