Markets reeling from inflation causing bond yields to jump

5th session of decline in a row: Paris lost 2.67%, Frankfurt 2.43%, London 1.49%. In Zurich, the SMI dropped 1.71%.

Financial markets were still reeling on Monday from record inflation in the United States, which is reigniting fears of recession in the prospect of possible additional monetary tightening by central banks.

In Europe, the European indices signed their 5th session of decline in a row: Paris lost 2.67%, Frankfurt 2.43%, London 1.49%. In Zurich, the SMI dropped 1.71%.

After heavy losses on Friday, the US indices were still struggling: the Dow Jones fell 1.94%, the Nasdaq index, with a strong technological composition, dropped 3.59% and the broader S&P 500 index lost 2.80%.

Equity markets are “in freefall as the reality of high inflation, even faster monetary tightening and a cost of living crisis really hits home,” said Oanda analyst Craig Erlam.

After the resurgence of inflation in the United States in May, investors fear that the US Federal Reserve will have an even heavier hand than expected so far in terms of monetary tightening.

They will have their eyes glued to his announcements at the end of his meeting, which is held on Tuesday and Wednesday. An increase in its key rates of half a percentage point, or 50 basis points, seems certain, but now the markets are worried about a stronger increase, of 75 basis points.

The same is true in the United Kingdom, where the central bank could raise rates more quickly after its meeting on Thursday while the possibility of a larger hike in key rates from the European Central Bank in September n hasn’t been a taboo since last week.

Bond shock

The risk of steeper rate hikes and recession was reflected in soaring sovereign yields.

The yield on 10-year US government bonds, which moves inversely to its price, hit its highest level in more than 11 years on Monday: the benchmark yield on US sovereign bonds rose to 3.32 %, a high since May 2011, against 3.15% on Friday.

The US 2-year bond rate climbed to 2007 levels and briefly exceeded long-term rates for the first time since April. It stood at 3.20% around 4:15 p.m. GMT.

In the euro zone, the movement was identical: the Italian debt saw its 10-year yield exceed 4%, the French borrowing rate for the same maturity exceeded 2% and the German Bund stood at 1.63%, a level not seen since 2014.

“The only thing that can calm the markets is to see the price of raw materials drop” in a pronounced and lasting way, said Alexandre Baradez, analyst at IG France.

Oil returns above $120

After falling for much of the day, oil prices were climbing back above $120.

Around 4:25 p.m. GMT, the price of a barrel of Brent from the North Sea rose 0.59% to 122.72 dollars and that of a barrel of American WTI rose by 0.46% to 121.22 dollars.

Bitcoin, yen and rupee at lows

The price of bitcoin, which had soared at the end of 2020 and in 2021 to reach a record high of 68,992 dollars, returned on Monday to its level of 18 months ago at less than 24,000 dollars, a drop of 66%.

The dollar, on the other hand, benefited from its status as a safe haven and from the prospect of further rate hikes by the American Federal Reserve (Fed).

The euro lost 0.69% to 1.0445 dollars.

The pound fell 1.02% against the greenback, to 1.2191 dollars to the pound, suffering from a contraction in the British economy in April.

The Indian rupee plunged Monday to an all-time low of 78.28 rupees to the dollar.

Widespread sale

Investors are fleeing the equity markets and the sale of securities concerned all sectors, starting with tech, automotive, mining, luxury and tourism.

Even the banks were down despite the rise in interest rates which increased their profitability.

Among the survivors

The British transport group Go-ahead ended up sharply (+ 11% there) after revealing that it had received two unsolicited takeover offers, the amounts of which were not identified.

Leave a Comment

This site uses Akismet to reduce spam. Learn how your comment data is processed.