Stocks and bond prices tumbled at the end of a tumultuous week, as a sharp sell-off in UK government debt cascaded into global markets.
Europe’s regional Stoxx 600 dropped 2.1 cent, a decline that took the gauge’s losses from its high point for the year in early January to more than 20 per cent, meeting the definition of a technical “bear market”.
London’s FTSE 100 extended its initial fall to move 1.9 per cent lower following Westminster’s mini-Budget on Friday, which included details of bold cuts in business and personal tax rates as part of a growth package aimed at stimulating growth in Britain’s stagnating economy.
UK government bond yields jumped by historic magnitudes across all maturities amid concerns over the cost of the government’s borrowing plans, which will be financed in large part by selling gilts.
The 10-year gilt yield soared 0.29 percentage points to 3.78 per cent, bringing its rise for the week to more than 0.6 percentage points — one of its biggest increases on record. The policy-sensitive two-year yield surged 0.44 percentage points to 3.95 per cent. Bond yields rise as their prices fall.
The five-year yield rose 0.54 percentage points, according to Refinitiv data, reaching 4.1 per cent.
The pound fell as much as 2.1 per cent against the dollar to a new 37-year low of $1.1022. The greenback rose 0.8 per cent against a basket of six peers to hit a fresh 20-year high.
The acute pressure in UK financial markets rippled across global asset prices, as fears intensified about how major central banks will continue to turn the screws on monetary policy while attempting to spur economic growth.
Futures contracts tracking Wall Street’s S&P 500 gauge slipped 1.2 per cent. Those tracking the Nasdaq 100 gauge lost 1.3 per cent. US government debt was also hit, with the yield on the two-year Treasury note adding 0.09 percentage points to 4.22 per cent.
The US Federal Reserve had on Wednesday set the stage for a flurry of interest rate rises by other central banks this week, lifting borrowing costs by 0.75 percentage points for the third time in a row and taking its target range to 3 to 3.25 per cent.
A day later, the Bank of England joined the tightening trend — jacking up rates by 0.5 percentage points to 2.25 per cent, while the Swiss National Bank took its lending rate into positive territory for the first time since 2015, at 0.5 per cent.
Rising US interest rates and the looming threat of a recession in the world’s largest economy prompted Goldman Sachs to cut its year-end forecast for the S&P 500 index to 3,600. This would imply a decline of just under 25 per cent for the US stock market over the whole of 2022.
David Kostin, an equity strategist at Goldman, said that a majority of the bank’s clients had adopted the view that a “hard landing” was inevitable for the US economy and investors’ focus was on the timing, magnitude and duration of a potential recession.
A hard landing for the US economy could drag the S&P 500 down to 3,400 by the end of the year and as low as 3,150 by the end of the first quarter, said Kostin.
Citi’s asset allocation team said the Fed had “all but promised a US recession” and investors should not pin any hopes on a “Santa Claus” rally for the stock market at the end of the year.