# Rate fever propels dollar, wallops stocks and bonds
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2022-08-30
Category: NEWS
Category URL: https://financedigest.com/category/news
Meta Title: Global Stocks Slump as U.S. and European Rate Hikes Loom
Meta Description: Global markets tumble as U.S. and European rate hike threats push dollar to 20-year highs, stoking fears of economic slowdown. Stay informed with Reuters.
URL: https://financedigest.com/rate-fever-propels-dollar-wallops-stocks-and-bondshtml

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By Dhara Ranasinghe and Koh Gui Qing

NEW YORK/LONDON (Reuters) – World stocks slumped on Monday as the growing risk of more aggressive U.S. and European interest [rate hikes](https://www.financedigest.com/stocks-falter-as-economic-worries-nag-nz-delivers-big-rate-hike.html "Stocks falter as economic worries nag, NZ delivers big rate hike") inflicted more pain on bond markets and pushed the dollar to new 20-year highs, as recession fears mount.

Two-year U.S. yields surged to a high of around 3.49%, the highest since late 2007 and far above the 10-year at 3.11%. Yields also jumped [across Europe](https://www.financedigest.com/air-pollution-surges-as-heatwave-sweeps-across-europe.html "Air pollution surges as heatwave sweeps across Europe"). \[GVD/EUR\]

Federal Reserve Chair Jerome Powell said at the Jackson Hole symposium on Friday the [Fed would raise rates](https://www.financedigest.com/dollar-falls-after-fed-raises-rates-forecasts-future-hike.html "Dollar falls after Fed raises rates, forecasts future hike") as high as needed to restrict growth, and keep them there “for some time” to bring down inflation running well above its 2% target.

[European Central Bank](https://www.financedigest.com/ecbs-villeroy-rate-hike-signals-strong-confidence-in-european-banks.html "ECB’s Villeroy: rate hike signals strong confidence in European banks") board member Isabel Schnabel added to market unease. She warned on Saturday that central banks risk losing [public trust and must](https://www.financedigest.com/2019-year-must-re-build-public-trust-finance.html "2019 is the year we must re-build public trust in finance") act forcefully to curb inflation, even if that drags their economies into a recession.

Investors waking up to the reality that rates would remain high even as recession [risk grows sold off risky assets](https://www.financedigest.com/analysis-watch-out-risk-assets-the-rout-in-bonds-is-coming-your-way.html "Analysis-Watch out risk assets, the rout in bonds is coming your way").

The S&P 500 index fell 0.66% to its lowest in a month after a [day of choppy trade](https://www.financedigest.com/stocks-fall-treasury-yields-rise-upon-final-2022-trading-day.html "Stocks fall, Treasury yields rise upon final 2022 trading day"). The Dow Jones Industrial Average lost 0.6%, and the Nasdaq Composite dropped 1%.

[European stocks](https://www.financedigest.com/european-stocks-hit-six-week-high-on-hopes-for-rate-hike-slowdown.html "European stocks hit six-week high on hopes for rate hike slowdown") fell 0.8% to their lowest in over five weeks, and Japan’s blue-chip Nikkei slid 2.7%.

London markets were closed for a holiday, while MSCI’s world equity index fell 1% to a one-month low.

The message from Jackson Hole was loud and [clear and not what markets were expecting,” said Nordea chief](https://www.financedigest.com/crypto-firms-will-develop-offshore-without-clear-us-rules-coinbase-chief-says.html "Crypto firms will develop ‘offshore’ without clear US rules, Coinbase chief says") analyst Jan von Gerich.

Central [banks need convincing evidence that inflation](https://www.financedigest.com/boes-bailey-says-rate-setters-can-put-inflation-before-bank-worries.html "BoE’s Bailey says rate-setters can put inflation before bank worries") is coming down. That is bad news for the economy and risk appetite and raises the risk of a deeper recession if we get more rapid [rate hikes.”](https://www.financedigest.com/sp-warns-of-possible-economic-blow-hit-to-japan-inc-from-boj-rate-hike.html "S&P warns of possible economic blow, hit to Japan Inc from BOJ rate hike")

Investors ramped up U.S. and euro zone [rate hike bets](https://www.financedigest.com/dollar-hits-one-month-high-against-yen-as-traders-bet-on-fed-rate-hike.html "Dollar hits one-month high against yen as traders bet on Fed rate hike"), with markets pricing in a greater chance of 75 basis point hikes from the Fed and ECB in September.

Fed funds [futures](https://www.financedigest.com/us-stock-futures-bonds-rally-as-markets-flirt-with-fed-pause.html "US stock futures, bonds rally as markets flirt with Fed pause") priced in as high as a 73% chance the Fed will hike by 75 basis points, and rates peaking at 3.75% to 4.0%.

[“Markets are focusing on discussing the message of ‘coordinated tightening’ from Jackson Hole as ECB and Fed](https://www.financedigest.com/stocks-up-bond-yields-fall-as-markets-mull-a-fed-policy-pause.html "Stocks up, bond yields fall as markets mull a Fed policy pause") appear to have re-committed to creating price stability: yields are shooting higher and risk assets are quite a bit lower since last week,” said Lars Sparreso Lykke Merklin, senior analyst at Danske Bank.

Much might depend on what U.S. August payrolls figures show this Friday. Analysts are looking for a moderate [rise of 285,000 following July’s blockbuster 528,000 gain](https://www.financedigest.com/global-equities-gain-as-rising-bond-yields-pressure-gold.html "Global equities gain, as rising bond yields pressure gold").

HUNKER DOWN

As investors hunkered down for front-loaded [rate hikes](https://www.financedigest.com/uk-economys-unexpected-bounce-spurs-more-boe-rate-hike-talk.html "UK economy’s unexpected bounce spurs more BoE rate hike talk"), key gauges of equity market volatility shot up.

The CBOE Volatility index, widely dubbed [Wall Street’s](https://www.financedigest.com/wall-street-stocks-power-higher-as-treasury-yields-and-dollar-ease.html "Wall Street stocks power higher as Treasury yields and dollar ease") fear index, rose to its highest since mid-July. The euro STOXX volatility index, the European equivalent, jumped to its highest level in six weeks.

Chair Powell and the Fed make it crystal clear that their [job fighting inflation remains unfinished,” researchers](https://www.financedigest.com/bridging-jobs-could-make-retirement-happier-research-finds.html "‘Bridging’ jobs could make retirement happier, research finds") at Morgan Stanley said in a note to clients. “The path for stocks from here will be determined by earnings, where we still see material downside.”

The aggressive chorus from central [banks lifted](https://www.financedigest.com/asian-stocks-rally-as-bank-jitters-calm-alibaba-lifts-mood.html "Asian stocks rally as bank jitters calm, Alibaba lifts mood") short-term yields globally, while further inverting the Treasury curve as investors priced in an eventual economic downturn.

This all benefited the safe-haven dollar, which briefly shot to a fresh two-decade peak at 109.48 against a basket of [major currencies](https://www.financedigest.com/u-s-dollar-advances-vs-major-currencies-as-risk-appetite-fades.html "U.S. dollar advances vs major currencies as risk appetite fades").

The [dollar hit a five-week high on the yen](https://www.financedigest.com/yen-sinks-as-rates-outlook-diverges-nz-dollar-tumbles.html "Yen sinks as rates outlook diverges; NZ dollar tumbles") and was last up 0.8% at 138.72, with bulls looking to re-test its July top of 139.38.

Sterling sank to a 2-1/2-year [low around $1.1649 as Goldman Sachs warned Britain was heading for recession](https://www.financedigest.com/low-use-of-shortened-work-hours-points-to-mild-german-recession-ifo.html "Low use of shortened work hours points to mild German recession – Ifo"). The [euro dropped to as low](https://www.financedigest.com/euro-rises-after-spanish-cpi-dollar-slips-towards-8-mth-low.html "Euro rises after Spanish CPI, dollar slips towards 8-mth low") as $0.99145, not far from last week’s two-decade trough of $0.99005, but was last up 0.3% at $0.9997

The Dutch September gas delivery contract dropped as much as 11% as Germany’s [economy minister said he expected prices to fall](https://www.financedigest.com/stocks-yields-fall-data-suggests-u-s-economy-cooling.html "Stocks, yields fall; data suggests U.S. economy cooling") soon as Germany is making progress on its storage targets, with facilities nearly 83% full and set to hit its 85% Oct. 1 goal in early September.

Supply fears [pushed natural gas futures in Europe 38% higher](https://www.financedigest.com/powells-warning-on-higher-u-s-rates-pushes-dollar-to-3-mth-high.html "Powell’s warning on higher U.S. rates pushes dollar to 3-mth high") last week, adding further fuel to the inflation bonfire as a three-day halt to Russian natural gas supplies through its main pipeline to Europe will start on Wednesday.

German benchmark power prices, meanwhile, breached 1,000 euros per megawatt hour for the first time on Monday.

I struggle to understand the sense of sharp (ECB) interest [rate hikes](https://www.financedigest.com/dollar-firms-after-u-s-labor-data-suggests-more-rate-hikes.html "Dollar firms after U.S. labor data suggests more rate hikes"). The [big problem](https://www.financedigest.com/with-big-bets-on-musk-these-funds-may-have-a-tesla-problem-in-23.html "With big bets on Musk, these funds may have a Tesla problem in ’23") is energy supply, and right now it doesn’t look we can get out any time soon,” said Carlo Franchini, head of institutional clients at Banca Ifigest in Milan.

“Such a sharp rise in such a complicated economic picture will put companies and households in a very difficult situation. Trading volumes are really thin. I think it would be worth sell into any rally even though the word rally doesn’t seem appropriate.”

The rise of the [dollar and yields has depressed gold](https://www.financedigest.com/stocks-and-gold-cheer-u-s-inflation-picture-while-dollar-slides.html "Stocks and gold cheer U.S. inflation picture, while dollar slides"), which was last flat at $1,737.45 an ounce.

Oil prices swung higher on speculation [OPEC+ could cut](https://www.financedigest.com/dollar-skids-after-soft-u-s-economic-data-impact-of-opec-cuts-fades.html "Dollar skids after soft U.S. economic data; impact of OPEC+ cuts fades") output at a Sept. 5 meeting. U.S. crude recently rose 4% to $96.82 per barrel and Brent was at $104.77, up 3.7% on the day.

GRAPHIC – Dollar index at 20-year highs, yields soar

https://fingfx.thomsonreuters.com/gfx/mkt/lgpdwyrwmvo/dollar.PNG

(Reporting by Dhara Ranasinghe; additional reporting by Yoruk Bahceli, Sam Indyk, Danilo Masoni and Wayne Cole, Editing by Susan Fenton, Christina Fincher, Carmel Crimmins, Tomasz Janowski and Richard Chang)


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