Stocks drop as rate-rise concerns collide with growth worries

Global stocks were hit with a fresh jolt of selling on Monday as central banks rapidly rein in crisis-era stimulus measures and investors fret about signs of slowdowns in the world’s large economies.

Wall Street’s blue-chip S&P 500 index slid 1.5 per cent in early trades and the tech-focused Nasdaq Composite dropped 1.8 per cent, with negative market sentiment dealing the heaviest blows to the most speculative assets, such as tech shares and cryptocurrencies.

Europe’s regional Stoxx 600 index fell 1.9 per cent, Bitcoin touched its lowest point since last July and an index of tech stocks listed on the S&P 500 fell 1.4 per cent.

Monday’s pullback comes as investors grapple with interest rate rises from the US Federal Reserve, intense inflation and emerging signs of strain in the world economy.

“Its difficult to say if everything is low enough and bearish enough,” said Joost van Leenders, equity strategist at Kempen Capital Management, adding that investors no longer expected the US Federal Reserve to prioritise stabilising financial markets, as it did during the start of the coronavirus pandemic.

“With [bond] yields rising and equity markets falling you have financial conditions tightening, which is what the Fed wants.”

Line chart of Yield on 10-year Treasury inflation-protected securities (%) showing US real yields shoot higher

The Fed last week lifted its main interest rate 0.5 percentage points, signalling that more large increases were on the horizon as it attempts to cool scorching inflation caused by supply chain issues linked to the pandemic, as well as higher food and energy costs.

“No one knows with any certainty if that’s enough to quell future inflation,” said Nicholas Colas, co-founder of DataTrek Research. “Hence all the recent market volatility.” Economists expect data released on Wednesday to show US consumer prices jumped 8.1 per cent in April from the same month last year.

Sustained inflation is causing prices of government bonds to drop significantly, in turn raising their income yields, which reduces investor appetite for riskier assets and raises companies’ borrowing costs.

The yield on the 10-year US Treasury note rose above 3.2 per cent on Monday before settling back to 3.14 per cent, still close to its highest since late 2018.

The 10-year US real-yield, which provides a snapshot of the long-term returns investors can earn after inflation on ultra-low risk securities, jumped 0.09 percentage points on Monday to 0.35 per cent, having started the year about minus 1 per cent.

Line chart of iTraxx Europe (spread, basis points) showing Investor concerns over European corporate bond market rise

Worries over rising rates have been compounded by indications that growth in big global economies could be slowing. Chinese export growth fell to its lowest in two years last month, according to data released on Monday, which followed reports last week pointing to slowdowns in the German and French manufacturing sectors.

The MSCI All-World barometer of global equities has fallen almost 15 per cent this year. On Friday, US stock markets closed out their longest streak of weekly losses in more than a decade.

Meanwhile, a measure of the cost of protecting against defaults on European corporate bonds rose on Monday to its highest level since 2020. The iTraxx Europe index, which tracks a basket of credit default swaps and is considered a gauge of investor sentiment towards risk in European markets, hit 100 basis points, from 49bp at the start of the year.

In commodities, international oil benchmark Brent crude dropped more 2 per cent to under $110 a barrel, signalling concerns over weaker demand.

Jobber Wiki author Frank Long added to this report.