(Bloomberg) — Selling deepened in riskier corners of the market as the U.K.’s plan to boost the economy fueled concerns about rising inflation that could lead to higher rates, adding to fears before a global recession.
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It was a sea of red for equity trading events around the world, with the rout in the S&P 500 pushing the gauge within striking distance of its June bottom — which is about 0.5% below current levels. The lack of full-blown capitalization could be a sign that death is not over yet. Big firms like Goldman Sachs Group Inc. are cutting their targets for stocks, warning that a significant upward shift in the outlook for rates will weigh on valuations.
As risk-off sentiment took hold, Treasuries reversed a slide that had earlier sent 10-year yields above 3.8%. The greenback hit a record, sweeping aside other currencies. The euro slipped to its weakest level since 2002, and the pound hit a 37-year low – with former US Treasury Secretary Lawrence Summers saying “naive” UK policies could create the conditions for the pound to reach parity down with the dollar.
“It looks like traders and investors are going to throw in the towel this week on an event that feels like ‘the sky is falling,'” said Kenny Polcari, chief strategist at SlateStone Wealth. “When everyone stops saying ‘they think a recession is coming’ and accepts that it’s already here – then the psyche will change.”
Liz Truss’s new UK government delivered the sharpest tax cuts since 1972 at a time when the Bank of England is struggling to contain inflation, which is almost five times its target. The fall in gilts means investors are now betting that the central bank will increase its benchmark lending rate by a full point to 3.25% in November, the sharpest increase since 1989.
Read: UK’s Biggest Tax Cuts Since 1972 Trigger Crash in Pounds, Bonds
Amid growing fears of an economic hard landing, commodities took a hit around the world. West Texas Intermediate fell below $80 a barrel for the first time since January and was set for a fourth week of decline. Even gold, seen as a safe haven asset, was unable to gain because of a rising dollar.
China’s yuan extended losses to the level closest to the weak end of its permitted trading band since a shock currency devaluation in 2015. With a hawkish Federal Reserve set to prop up the dollar’s global strength, analysts say there is only so much Beijing can do done to remove the coin. its currency at a time of economic difficulties.
The greenback’s strength has been relentless and will be a “big drag” on corporate earnings — acting as a headwind for stocks, said David Rosenberg, founder of his eponymous research firm.
KKR & Co see potential trouble ahead, including a mild recession next year, with the Fed narrowly focused on pushing up unemployment to tame inflation. The labor shortage in the United States is so severe that tightening the Fed may not work, writes leading macro strategist Henry McVey.
“This is a more severe result than falling corporate profits,” McVey said, “because it will encourage even more tightening of the Fed.”
Investors are flocking to cash and shunning almost every other asset class as they turn into the most pessimistic since the global financial crisis, according to Bank of America Corp. Investor sentiment is “without a doubt” the worst since the 2008 crisis, with losses since. Government bonds were the highest since 1920, strategists led by Michael Hartnett wrote in a note.
“It’s understandable that interest rates will continue to rise here and that will put pressure on earnings,” said Chris Gaffney, president of global markets at TIAA Bank. “Valuations are still a bit high even though they’ve come down, there’s still a lot more to go up in interest rates and how that’s going to affect the global economy — are we headed for a sharper recession than the recession everyone was expecting? I think it’s a combination of all of that, it’s not good news.”
Indeed, stocks are still far from clear markets. At the June low, the S&P 500 was trading at 18 times earnings, a multiple that surpassed trough valuations seen in each of the previous 11 bear cycles, data compiled by Bloomberg show. In other words, if equities recover from here, this underlying market will be the most expensive since the 1950s.
Gloomy sentiment is often considered a contrarian indicator for the US stock market, under the belief that extreme pessimism could be a sign of brighter times ahead. But history suggests equity losses could accelerate further from here before the current bear market ends, according to Ned Davis Research.
The firm’s Crowd Sentiment Poll has been in a very pessimistic zone since April 11, or 112 consecutive trading days representing the third-longest streak since data began in 1995. Over the following months after those periods of sentiment the -pessimistic, equity gains were extremely broad, with median negative returns three and six months after the 100-day mark.
In another threat to stocks, various iterations of the so-called sustainment model, which compares bond returns to stock earnings returns, show that equities have been the least attractive relative to corporate bonds and Treasuries since 2009 and early 2010, respectively. This signal is being heeded by investors, who now know to look to other markets for similar or better results.
The S&P 500’s plunge from its August peak solidifies the downward channel that has been in place since the apex of the bull market in early January, according to Gina Martin Adams at Bloomberg Intelligence. “The breakdown below 3,900 support leaves little for the index to grasp as it tests the June lows,” she wrote.
Here are some of the main deals in the markets:
The S&P 500 fell 1.9% as of 11:04 New York time
The Nasdaq 100 fell 1.7%
Dow Jones Industrial Average fell 1.5%
The Stoxx Europe 600 fell 2.3%
The MSCI World index fell 2.1%
The Bloomberg Dollar Spot Index rose 1.1%
The euro fell 1.3% to $0.9710
The British pound fell 3.1% to $1.0915
The Japanese yen fell 0.6% to 143.20 per dollar
Bitcoin fell 3.3% to $18,606.9
Ether fell 3.5% to $1,278.6
The yield on 10-year Treasuries was little changed at 3.71%
Germany’s 10-year yield advanced four basis points to 2.01%
Britain’s 10-year yield advanced 28 basis points to 3.78%
West Texas Intermediate crude fell 5.8% to $78.66 a barrel
Gold futures fell 1.7% to $1,652.70 an ounce
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