# Stocks hit two-year lows, sterling comes under fire
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2022-09-28
Category: NEWS
Category URL: https://financedigest.com/category/news
Meta Title: Global Recession Fears Intensify as World Shares Sink
Meta Description: Stay informed with the latest update on world shares hitting two-year lows, spike in borrowing costs, and central banks' aggressive actions to combat
URL: https://financedigest.com/stocks-hit-two-year-lows-sterling-comes-under-firehtml

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By Wayne Cole and Amanda Cooper

LONDON/SYDNEY (Reuters) – World shares sank to two-year lows on Wednesday, hammered by spiralling borrowing costs that intensified fears of a global recession and sent investors into the arms of the safe-haven dollar.

Yields on U.S. 10-year Treasuries topped 4.0% for the first [time since](https://www.financedigest.com/soccer-arsenal-reach-womens-champions-league-semis-for-first-time-since-2013.html "Soccer-Arsenal reach Women’s Champions League semis for first time since 2013") 2010 as markets wagered the Federal Reserve might have to take rates past 4.5% in its crusade against inflation.

The pound came under fire again on the back of a renewed surge in UK bond yields that have driven the government’s borrowing [costs above those with heavier debt burdens](https://www.financedigest.com/blessing-or-burden-what-else-could-you-buy-for-the-cost-of-your-timeshare.html "Blessing or burden? What else could you buy for the cost of your timeshare?") such as Greece or Italy. \[GB/\]

The International Monetary Fund (IMF) and [ratings agency Moody’s criticised Britain’s new economic](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") strategy. [Investors braced for more havoc in bond markets that has already forced the Bank](https://www.financedigest.com/stocks-rise-after-bank-sale-fuels-investor-risk-appetite.html "Stocks rise after bank sale fuels investor risk appetite") of England to promise “significant” action.

Central banks around the world have jacked up interest rates in the last week and said they would do whatever it takes to fight red-hot inflation, particularly as the northern hemisphere winter [risks exacerbating a global energy](https://www.financedigest.com/britains-tax-take-risks-blowing-green-energy-off-target.html "Britain’s tax take risks blowing green energy off target") crunch.

It is now clear that central banks in advanced economies will make the current tightening cycle the most aggressive in three decades,” said Jennifer McKeown, [head of global](https://www.financedigest.com/new-york-catches-up-with-london-to-head-citys-global-centres-survey.html "New York catches up with London to head City’s global centres survey") economics at Capital Economics.

While this may be necessary to [tame inflation](https://www.financedigest.com/central-banks-opt-for-shock-and-awe-to-tame-inflation.html "Central banks opt for shock and awe to tame inflation"), it will come at a significant economic cost.

In short, we think the next [year will look like a global recession](https://www.financedigest.com/uk-to-avoid-recession-this-year-but-outlook-still-weak-bcc-says.html "UK to avoid recession this year but outlook still weak, BCC says"), feel like a global recession, and maybe even quack like one, so that’s what we’re now calling it.

The MSCI All-World index lost 0.65% to [hit its lowest since](https://www.financedigest.com/uk-mortgage-approvals-hit-lowest-since-june-2020.html "UK mortgage approvals hit lowest since June 2020") November 2020. It’s heading for a 9% drop in September – set for its [biggest monthly decline since March 2020’s 13% fall](https://www.financedigest.com/japans-factory-output-posts-biggest-fall-in-8-months-on-weak-autos-chips-sectors.html "Japan’s factory output posts biggest fall in 8 months on weak autos, chips sectors").

In Europe, the STOXX 600 shed 1.2% in early trading, led by declines in industrials such as steelmaker ThyssenKrupp and aluminium maker Norsk Hydro.

Across the region, the export-sensitive DAX <.GDAXI > fell 1.7% to its lowest since late 2020, while the FTSE 100 fell nearly 2%, in line with other battered UK assets.

S&P 500 futures dropped 0.9%, while Nasdaq futures lost 1.2%. If the [benchmark index falls at the open later, this will mark the S&P 500’s seventh day](https://www.financedigest.com/tall-marks-its-25th-year-with-celebration-day.html "TALL Marks its 25th Year with Celebration Day ") of losses.

European government bonds came under pressure again as the region’s energy crisis intensified following a series of incidents that caused leaks on the [Nord Stream](https://www.financedigest.com/denmark-invites-nord-stream-operator-to-help-salvage-unidentified-object.html "Denmark invites Nord Stream operator to help salvage unidentified object") pipeline.

Germany’s 10-year government [bond yield](https://www.financedigest.com/wall-st-stocks-fall-bond-yields-rise-as-china-drops-quarantine-rule.html "Wall St stocks fall, bond yields rise as China drops quarantine rule"), rose 5 basis points (bps) to 2.3% after hitting a nearly 11-year high at 2.309%. \[GVD/EUR\]

[“European sovereign yields have soared](https://www.financedigest.com/analysis-east-europeans-count-their-pennies-for-christmas-as-food-costs-soar.html "Analysis-East Europeans count their pennies for Christmas as food costs soar") to multi-year highs amid concerns about UK policy-making and a right-ward shift of Italian politics in the midst of still elevated inflation,” wrote analysts at JPMorgan in a note.

The Italian 10-year [spread to the German](https://www.financedigest.com/german-yields-steady-spreads-tighten-after-recent-repricing.html "German yields steady, spreads tighten after recent repricing") Bund has eclipsed 250bp, well above the 200bp mark we believe makes the ECB uncomfortable.

Shaking investor confidence has been the collapse in sterling and UK bond prices, which could force some [fund managers to sell](https://www.financedigest.com/intercos-fund-shareholders-l-catterton-otpp-sell-6-stake-at-7-discount.html "Intercos fund shareholders L Catterton, OTPP sell 6% stake at 7% discount") other assets to cover losses.

Underlining the risk of yet higher interest rates, the chief economist at the [Bank of England](https://www.financedigest.com/the-recent-bank-of-england-meeting-the-biggest-rate-hike-recession-warning-and-the-fallout.html "The recent Bank of England meeting, the biggest rate hike, recession warning and the fallout") said the tax cuts would likely require a “significant policy response.

Moody’s on Tuesday told the British government that large unfunded [tax cuts were “credit](https://www.financedigest.com/eu-us-working-on-deal-to-make-ev-minerals-eligible-for-tax-credits-eu-official.html "EU, US working on deal to make EV minerals eligible for tax credits -EU official") negative” and could undermine the government’s fiscal credibility.

MORE RISK PREMIUM, PLEASE

At the heart of this most recent sell-off was the British government’s so-called “mini-budget” last week that announced a raft of tax cuts and little in the [way of detail as to how those would be funded](https://www.financedigest.com/6-ways-to-fund-university.html "6 Ways to Fund University").

Gilt prices have plunged, the [pound has hit](https://www.financedigest.com/pound-hits-10-month-peak-euro-up-as-dollar-under-pressure.html "Pound hits 10-month peak, euro up as dollar under pressure") record lows as a result.

George Saravelos, global head of FX strategy at Deutsche Bank Research, said investors now wanted more to finance the country’s deficits, including a 200-basis-point rate [hike](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") by November and a terminal rate up at 6%.

This is the [level of risk premium that the market now demands](https://www.financedigest.com/delta-sees-return-to-profit-as-travel-demand-hits-historic-levels.html "Delta sees return to profit as travel demand hits ‘historic’ levels") to stabilize the currency,” said Saravelos. “If this isn’t delivered, it risks further currency weakening, further imported inflation, and further tightening, a vicious cycle.”

Sterling fell 0.5% to $1.0685, still above Monday’s record trough of $1.0327 and set for its biggest monthly slide since the [Brexit vote](https://www.financedigest.com/35-days-after-the-brexit-vote-uk-bricks-mortar-are-far-from-crumbling.html "35 days after the Brexit vote, UK bricks & mortar are far from crumbling") in June 2016.

The safe-haven [dollar has been a major beneficiary from the rout in sterling](https://www.financedigest.com/sterling-steadies-vs-dollar-ahead-of-boe-ecb-meetings.html "Sterling steadies vs dollar ahead of BoE, ECB meetings"), rising to a fresh 20-year peak of 114.680 against a basket of currencies.

The euro fell for a sixth straight day, dropping 0.35% to $0.9560 narrowly off last week’s [20-year low](https://www.financedigest.com/analysis-euros-20-year-low-leaves-ecb-facing-costly-choices.html "Analysis-Euro’s 20-year low leaves ECB facing costly choices") of $0.9528.

The [dollar also touched a record high on the offshore-traded Chinese yuan](https://www.financedigest.com/dollar-slips-yuan-gains-on-china-pmi-hot-inflation-lifts-euro.html "Dollar slips, yuan gains on China PMI; hot inflation lifts euro") at 7.2387, having risen for eight straight sessions.

The mounting pressure on emerging market currencies from the dollar’s [rise is in turn adding to risks that those countries will have to keep lifting](https://www.financedigest.com/sterling-rises-as-receding-bank-sector-worries-lift-sentiment.html "Sterling rises as receding bank sector worries lift sentiment") interest rates and undermine growth.

The ascent of the [dollar and bond yields has also been a drag for 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 hovering at $1,624 an ounce after hitting lows not seen since April 2020. \[GOL/\]

[Oil prices fell again as demand worries and the strong dollar](https://www.financedigest.com/oil-slumps-on-economic-data-stronger-u-s-dollar.html "Oil slumps on economic data, stronger U.S. dollar") offset support from U.S. production cuts [caused by Hurricane](https://www.financedigest.com/hurricane-matthew-causes-up-to-15bn-impact-to-us-and-caribbean-economies-in-october-according-to-aon-catastrophe-report.html "Hurricane Matthew causes up to bn impact to US and Caribbean economies in October, according to Aon catastrophe report") Ian. \[O/R\]

Brent fell 2% to $84.45 a barrel, while U.S. crude dropped 2.4% $76.61 a barrel.

(Reporting by Wayne Cole; Editing by Shri Navaratnam, Kim Coghill and Angus MacSwan)


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