Wall Street slumps over negative macro ‘tsunami’

By Lawrence Delevingne

(Reuters) -U.S. stocks and oil prices declined in choppy trading on Monday, even as the dollar and Treasury yields rose, as Wall Street digested a raft of what it read as negative macroeconomic news.

With markets already jittery from central bank signals of additional interest rate hikes, U.K. government fiscal plans released Friday continued to roil markets. Sterling slumped to a record low on Monday and a renewed selloff in British gilts pushed euro zone bond yields higher.

U.S. stocks were mixed to start the week but soon turned lower by midday Monday. The Dow Jones Industrial Average and the S&P 500 both fell nearly 1%, while the Nasdaq Composite declined by about 0.2%.

Global equities also fell on concerns about high interest rates continued to put pressure on the financial system, although reaction to Italy’s election result, where a right-wing alliance won a clear majority, was muted.

Europe’s STOXX 600 index slipped to hit a new low since December 2020, last down 0.4% on the day. Asian stocks fell 1.7%.

“I think everyone felt they were swimming in a tsunami of newsflow last week after one of the most incredible macro weeks in recent memory,” Deutsche Bank strategist Jim Reid wrote in a client note on Monday.

That wave of mostly negative information pushed Wall Street’s so-called fear index, the VIX, up around 6% on the day – approaching levels not seen since October 2020.

The pound skidded to an all-time low against the dollar, last trading down around 1.4%. The Bank of England said on Monday it would not hesitate to change interest rates and was monitoring markets “very closely” after the pound plunged.

Sterling’s declines are partly due to dollar strength, which hit a new 20-year top of 114.58 in early trade. It was last at $114.06, up about 0.8%.

“The Bank of England is in a very difficult spot where if they don’t react, they risk another sterling collapse and things getting very messy,” said Mike Riddell, senior portfolio manager, Allianz Global Investors. “If they do react, a developed market hiking rates to defend the currency looks like an emerging market. So they’re damned if they do, damned if they don’t.”

STRESS BUILDING

European government bonds were also hit. Five-year UK government bond yields jumped 50 basis points to their highest since October 2008, sending euro zone bond yields higher. Germany’s 10-year government bond yield hit its highest since December 2011 at 2.132%, [DE10YT=RR] and Italy’s benchmark bond yields rose to their highest since 2013. [GVD/EUR]

In the United States, Treasury yields also rose to new highs on Monday as concerns lingered that central banks globally will keep tightening monetary policy to curb stubbornly high inflation.

Two-year Treasury yields, which tend to be more sensitive to interest rate changes, rose to a near 15-year high of 4.214%, and benchmark 10-year note yields jumped to 3.859%.

Oil prices hit nine-month lows on Monday in choppy trade, pressured by a strengthening dollar as market participants awaited details on new sanctions on Russia.

U.S. crude fell 2.15% to $77.05 per barrel and Brent last traded at $84.30, down 2.15% on the day.

Spot gold dropped 0.8% to $1,630.41 an ounce, after dropping to its lowest price since April 2020 at $1,626.41.

“There has been an economic logic at play, as central banks raised rates to drive monetary policy into restrictive territory, get below trend growth for a while – a polite way of saying a recession – and then you get lower inflation,” said Samy Chaar, chief economist at Lombard Odier.

“The question is whether the financial world can go through that sequence. It feels like we are reaching the limit of that, things are starting to break, for example what we see with sterling.”

(Reporting by Lawrence Delevingne in Boston, Alun John in London and Tom Westbrook in Sydney; Additional reporting by Harry Robertson in London and Danilo Masoni in Milan; Editing by Toby Chopra, Marguerita Choy and Josie Kao)